FOR IMMEDIATE RELEASE
Cytonn Investments has today released its H1’2019 Banking Sector Review, which highlighted the performance of the listed banks in Kenya following the release of the H1’2019 financial results. As per the report, banks had a decline in performance on aggregate, as they recorded a 9.0% average increase in core Earnings per Share (EPS), compared to a growth of 19.0% in H1’2018. As a result, the Return on Average Equity declined marginally to 19.3% compared to 19.5% recorded in a similar period in 2018.
The report, themed “Consolidation and Revenue Diversification to Drive Growth in the Kenyan Banking Sector”, analyzed the H1’2019 results of the listed banks. “We note that the increased emphasis on operating efficiency by banks seems to be bearing fruit, with the listed banking sector’s operating efficiency improving y/y as seen in the H1’2019 figures, where the average cost-to-income ratio was 55.1%, lower than the 5 year average of 58.0%. Cost containment is likely to continue being a focus area and we expect continued restructuring, possibly leading to staff layoffs, as staff headcount demands reduce, on increased usage of mobile and digital channels”, said Caleb Mugendi, Investment Associate at Cytonn Investments. “The continued focus on alternative banking channels continues to boost banks’ Non-Funded Income (NFI) which grew by 16.5% compared to 6.9% seen in H1’2018 showing the shifted focus towards the segment has borne fruit for the sector. There are four key drivers in the sector, namely Regulation, Revenue Diversification, Consolidation and Asset Quality in this report. With a tighter operating environment, diversification of revenue, cost management and asset quality management will prove to be the key growth drivers for players in the banking sector. We expect more forays by banks into the NFI segment, as players seek to alleviate the effects of the interest rate cap regime”, added Caleb.
With the deteriorating asset quality, as indicated by the rise in the Gross Non-Performing Loans (NPLs) ratio to 10.0%, from 9.8% in H1’2018, much higher than the 5-year average of 7.6%, we still expect banks to continue employing prudent loan disbursement policies, and consequently tighten their credit standards, in order to address these concerns around asset quality. “The tough operating environment has made it hard for the smaller banks that do not serve a niche. The first half of 2019 was characterized by consolidation activity in the banking sector involving some of the major players in the industry, among them KCB Group which acquired National Bank, NIC Group which merged with CBA Group and Equity Group which is set to acquire a controlling equity stake in Commercial Bank of Congo (BCDC). We are likely to see more consolidation activity, as larger banks acquire the smaller players in the sector, who are constrained in capital, as they seek to grow their market share, penetrate new market segments and expand their product offerings. We expect to see mergers and strategic partnerships between banks, aimed at creating larger entities with sufficient capital base to pursue growth as well as increase their respective competitive edge and pricing power. The residual effect will be a stable sector with well capitalized players able to catalyze economic growth as well as withstand any systemic shocks,” said David Ngugi, Investment Analyst at Cytonn Investments.
Table 1: Cytonn’s H1’2019 Listed Banks Earnings and Growth Metrics
|
Bank |
Core EPS Growth |
Interest Income Growth |
Interest Expense Growth |
Net Interest Income Growth |
Net Interest Margin |
Non-Funded Income Growth |
NFI to Total Operating Income |
Growth in Total Fees & Commissions |
Deposit Growth |
Growth in Government Securities |
Loan to Deposit Ratio |
Loan Growth |
Return on Average Equity |
|
|
Barclays Bank Kenya |
18.0% |
7.4% |
30.8% |
0.6% |
8.4% |
12.6% |
32.4% |
11.1% |
5.9% |
15.4% |
81.3% |
6.0% |
18.1% |
|
|
I&M Bank |
17.0% |
8.8% |
18.3% |
2.2% |
6.0% |
21.9% |
39.3% |
6.0% |
12.5% |
28.5% |
72.6% |
5.7% |
17.7% |
|
|
Stanbic Holdings |
14.4% |
10.5% |
5.2% |
19.5% |
5.1% |
10.1% |
47.8% |
53.2% |
10.3% |
8.1% |
74.4% |
15.0% |
15.3% |
|
|
Diamond Trust Bank |
11.0% |
(6.6%) |
(5.5%) |
(7.5%) |
6.0% |
8.5% |
24.5% |
(15.6%) |
0.5% |
14.4% |
67.4% |
(3.8%) |
13.9% |
|
|
Equity Group |
9.1% |
9.2% |
14.3% |
7.6% |
8.5% |
25.6% |
44.0% |
16.1% |
16.5% |
13.0% |
70.0% |
16.7% |
22.1% |
|
|
NIC Group |
8.6% |
0.9% |
(7.0%) |
7.7% |
6.0% |
23.9% |
32.5% |
29.3% |
3.5% |
8.1% |
77.8% |
3.1% |
12.0% |
|
|
SCBK |
5.4% |
(7.3%) |
(26.0%) |
0.0% |
7.6% |
(2.2%) |
32.4% |
(12.8%) |
(1.0%) |
(15.2%) |
52.5% |
7.4% |
18.2% |
|
|
KCB Group |
5.0% |
4.3% |
1.6% |
5.2% |
8.2% |
14.7% |
34.1% |
3.5% |
7.3% |
20.3% |
85.0% |
13.6% |
22.7% |
|
|
Co-operative Bank |
4.6% |
(1.7%) |
3.5% |
(3.8%) |
8.4% |
25.1% |
38.0% |
38.1% |
9.0% |
14.2% |
79.6% |
2.6% |
18.8% |
|
|
National Bank of Kenya |
(40.1%) |
7.3% |
(14.4%) |
20.0% |
8.2% |
(28.7%) |
19.4% |
(4.6%) |
(4.9%) |
(17.5%) |
51.8% |
(1.0%) |
6.7% |
|
|
HF Group |
N/A |
(15.6%) |
(9.8%) |
(23.5%) |
4.0% |
55.8% |
47.1% |
44.4% |
(6.6%) |
5.4% |
91.0% |
(14.8%) |
(6.5%) |
|
|
H1'2019 Mkt Weighted Average* |
9.0% |
3.7% |
5.3% |
3.8% |
7.7% |
16.5% |
37.2% |
12.7% |
8.6% |
12.1% |
73.8% |
9.8% |
19.3% |
|
|
H1'2018 Mkt Weighted Average** |
19.0% |
7.9% |
12.0% |
6.4% |
8.1% |
6.9% |
34.3% |
4.6% |
10.0% |
14.9% |
73.8% |
3.8% |
19.5% |
|
|
*Market cap weighted as at 6/09/2019 **Market cap weighted as at 31/08/2018 |
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Takeaways from the table above include:
- Kenya Listed Banks recorded a 9.0% average increase in core Earnings per Share (EPS), compared to a growth of 19.0% in H1’2018. As a result, the Return on Average Equity decreased marginally to 19.3% compared to 19.5% recorded a similar period in 2018,
- Deposit growth came in at 8.6%, slower than the 10.0% growth recorded in H1’2018. On the other hand, interest expense increased at a slower pace of 5.3%, compared to 12.0% in H1’2018, indicating that banks have been able to mobilize relatively cheaper deposits. In addition, the removal of the 70.0% minimum deposit payable on deposits in the Finance Act 2018 reduced the cost of deposit funding,
- Average loan growth came in at 9.8%, which was faster than the 3.8% recorded in H1’2018, indicating that there was an improvement in credit extension to the economy. Government Securities on the other hand recorded growth of 12.1%, which was a slower growth rate compared to the 14.9% in H1’2018. This shows that banks have begun to adjust their business models, focusing more on private sector lending as opposed to investing in government securities, whose yields declined during the year. Interest income increased by 3.7%, slower than the 7.9% recorded in H1’2018. Consequently, the Net Interest Income grew by 3.8%, slower than the 6.4% recorded in H1’2018,
- The average Net Interest Margin in the sector came in at 7.7%, lower than the 8.1% in H1’2018. The decline was mainly due to a decline in yields recorded in government securities, coupled with the decline in yields on loans due to the 100-bps decline in the Central Bank Rate, and,
- Non-Funded Income grew by 16.5% y/y, faster than the 6.9% recorded in H1’2018. The growth in NFI was boosted by the total fee and commission income which improved by 12.7%, compared to the 4.6% growth recorded in H1’2018, owing to the faster loan growth.
Table 2: Listed Banks Return on Average Equity
The table below ranks banks based on their Return on Average Equity (RoAE):
|
Bank |
Return on average equity |
|
KCB |
22.7% |
|
Equity |
22.1% |
|
Co-op |
18.8% |
|
SCBK |
18.2% |
|
Barclays |
18.1% |
|
I&M |
17.7% |
|
Stanbic Bank |
15.3% |
|
DTBK |
13.9% |
|
NIC |
12.0% |
|
NBK |
6.7% |
|
HF |
(6.5%) |
|
H1'2019 Mkt cap Weighted Average* |
19.30% |
|
H1'2018 Mkt cap Weighted Average |
19.50% |
*Market cap weighted as at 6th September 2019
Source: Cytonn Research
Notes to the Editor:
Cytonn Investments is an independent investment management firm, with offices in Nairobi - Kenya and D.C. Metro - U.S. We are primarily focused on offering alternative investment solutions to individual high net-worth investors, global and institutional investors and Kenyans in the diaspora interested in the high-growth East-African region. We currently have over Kshs 82.0 billion of investments and projects under mandate, primarily in real estate.
Cytonn Real Estate is Cytonn’s development affiliate, which is focused on developing institutional grade real estate targeted at specific institutional, high net-worth and Diaspora investors. Collective, Cytonn Investments and Cytonn Real Estate manage over Kshs 82.0 billion of real estate projects.
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