NAIROBI, KENYA, SEPTEMBER 5, 2016 – Equity Bank Group emerged top in H1’2016 Cytonn Banking Report, supported by a strong franchise and intrinsic value score - the franchise score measures the broad and comprehensive business strength of the company and the intrinsic score measures the upside potential return. National Bank was ranked the lowest, ranking lowest in both franchise and intrinsic value score.
“The report themed ‘Transition continues, to a more regulated, yet innovative environment’ analyzed all listed banks in the Kenyan market so as to take a view as to which banks are the most attractive and stable for investments from a franchise value and future growth opportunity perspective,’’ said Elizabeth Nkukuu, Cytonn’s Chief Investment Officer. “As the banking sector undergoes significant transition, such as increased regulation, realignment through strategic initiatives, and need for innovative banking following the signing into law of The Banking Act (Amendment) Bill 2015, we believe that consolidation is going to happen in the near-term with the weaker banks being the acquisition target,” added Elizabeth.
KCB Group emerged second, dropping one position compared to Q’1 2016 Banking Report, Co-operative Bank of Kenya retained third position, with I&M Bank ranking at position four, up one position from Q’1 2016 rankings. Barclays Bank fell three positions to position 7, affected by a drop in intrinsic value ranking. This was due to a low expected future growth rate of 2.8% given high competition in the banking sector with its peers being more competitive and innovative in their distribution channels and product offering. Diamond Trust Bank improved from position 9 to position 5 on the back of a strong loan book growth and coverage policy with the NPL ratio at 4.1% against an industry average of 10.6% with the NPL coverage of 53.9% against an industry average of 35.4%. National Bank retained the last position overall, ranking lowest in both franchise and intrinsic score. NBK has the highest cost to income ratio of 64.6% against the industry average of 47.1%. In addition, National Bank has the largest Non-Performing Loans (NPLs) at 42.1% against the industry average of 10.6%, with one of lowest NPL coverages at 18.1% against the industry average of 35.4%. Being a bank with significant public interest in NBK, with over 70% owned by the Kenyan public, through Treasury and National Social Security Funds shareholding, it is in the public interest that a restructuring be considered to protect and create value for the Kenyan public.
With GDP growth prospects for 2016 at 5.8%, Kenya’s listed banks recorded improved Earning Per Share (EPS) growth of 15.8% in H1”2016 compared to 4.7% in H1’2015 growth of 4.7%. This was on the back of an improved macro-economic environment, which saw interest rates decline to below historical average levels as evidenced by the interbank and the 91-day T-bill rates declining to 2.3% and 7.1%, respectively, providing a conducive environment for credit uptake. With the banking sector contributing 10.1% of GDP, a strong growth exhibited by the sector is beneficial to drive the economy.
“The growth in Kenya’s banking sector can be attributed to the sector’s ability to develop products that respond to the needs of Kenyans such as convenience and efficiency through alternative banking channels such as mobile and agency banking, increased financial inclusion and rapid growth of Kenya’s middle class leading to increased demand for intermediary services such as banking,” said Maurice Oduor, Investment Manager. “However, as a result of the interest rate cap, we might witness contraction of the private sector credit growth as banks opt to loan to the government which is considered risk free. Subprime borrowers will likely have to go to non-bank financial institutions,” added Maurice.
As the sector continues to be in transition, key issues such as the introduction of Internal Capital Adequacy Assessment Process (ICAAP) framework, increased discipline and focus on sufficient provisioning, and increased level of “controlled” regulation (Prudential Guidelines and Interest Rate Cap) will transition the industry into consolidation and innovation leading to a more efficient and stable banking sector.
The report is available online: Banking Sector Report.
Table: Cytonn H1 2016 Banking Sector Report Ranking
| CYTONN’S H1'2016 BANKING REPORT RANKINGS | |||||
| Banks | Franchise Value Total Score | Total Return Score | Weighted H1'2016 Score | H1'2016 rank | Q1'2016 rank |
| Equity | 52.0 | 4.0 | 23.2 | 1 | 2 |
| KCB Group | 59.0 | 1.0 | 24.2 | 2 | 1 |
| Co-operative Bank | 60.0 | 3.0 | 25.8 | 3 | 3 |
| I&M | 69.0 | 6.0 | 31.2 | 4 | 5 |
| Diamond Trust Bank | 71.0 | 5.0 | 31.4 | 5 | 6 |
| Standard Chartered | 72.0 | 10.0 | 34.8 | 6 | 7 |
| Barclays | 75.0 | 9.0 | 35.4 | 7 | 4 |
| CfC Stanbic | 83.0 | 8.0 | 38.0 | 8 | 9 |
| NIC | 87.0 | 7.0 | 39.0 | 9 | 8 |
| Housing Finance | 105.0 | 2.0 | 43.2 | 10 | 10 |
| NBK | 123.0 | 11.0 | 55.8 | 11 | 11 |
Source: Cytonn Investments
NB: The above highlight a bank’s profitability, efficiency, growth, asset quality, liquidity, revenue diversification, capitalization and soundness.
