Cytonn Investments has today released its H1’2021 Banking Sector Report, which ranks I&M Group as the most attractive bank in Kenya, supported by a strong franchise value and intrinsic value score. This is the 6th time in a row that I&M has ranked in the first position mainly due to its solid fundamentals such as its positive management quality and asset quality during the period. The franchise score measures the broad and comprehensive business strength of a bank across 13 different metrics, while the intrinsic score measures the investment return potential. ABSA Bank, which recorded an 846.0% EPS growth, was the most improved bank, coming in second from fifth in Q1’2021.
The report, themed “Reduced Provisioning levels Spur Earnings Growth” analysed the H1’2021 results of the listed banks. “There was a significant improvement in the performance of the listed banking sector during the quarter, with the Core Earnings per Share recording a weighted increase of 136.0% in H1’2021, compared to a weighted decline of 33.6% recorded in H1’2020. The significant increase in earnings was mainly attributable to reduced provisioning levels by the listed banks following the relatively stable business operating environment during the period, with Loan Loss Provisions recording a weighted average decline of 24.8% in H1’2021, compared to a weighted growth of 233.2% in FY’2020 and 5.5% in Q1’2021. The performance in H1’2021 is however skewed by the strong performance from ABSA, KCB Group, and Equity Group, which recorded core EPS growths of 846.0%, 101.9% and 97.7%, respectively. Non-Funded income grew by 19.2%, compared to a decline of 1.1% recorded in H1’2020, attributable to the expiry of the waiver on fees and commissions on loans and advances issued by the CBK in March 2020. Interest income recorded a 15.0% increase, compared to the 10.4% increase recorded in H1’2020, while investments in government securities grew by 12.4%, faster than the 11.7% loan growth recorded during the period. Consequently, the Yield on Interest Earning Assets (YIEA) increased to 9.9%, from the 9.7% recorded in H1’2020, with Net Interest Margin (NIM) increasing to 7.4%, 0.4% points higher than the 7.0% recorded in H1’2020 for the whole listed banking sector.”, said Ann Wacera, Investment Analyst at Cytonn Investments. Four key drivers shaped the Banking sector in H1’2021, namely; Regulation, Regional Expansion through Mergers and Acquisitions, Asset Quality Deterioration, and Capital Raising.
“On the regulatory front, the loan restructuring window as per the Banking Circular No 3 of 2020 by the Central Bank of Kenya provided to commercial banks and mortgage finance companies on loan restructuring came to an end on March 2nd 2021, having seen loans worth Kshs 1.7 tn restructured, representing 57.0% of the banking sector’s loan book. Mergers and Acquisitions remained a key theme in H1’2021, with the current environment providing opportunities for bigger banks with an adequate capital base to expand and take advantage of the low valuations in the market to further consolidate and buy out smaller banks. We also saw listed banks turning to borrowing from international institutions to not only strengthen their capital position but also boost their ability to lend to the perceived riskier Micro Small and Medium Sized Enterprises (MSMEs) segment in order to support the small businesses in the tough operating environment occasioned by the COVID-19 pandemic.”, said Robert Karuiyi, Analyst at Cytonn Investments.
I&M Group took the top position in the Intrinsic Value rankings, indicating a superior future growth opportunity and investment return potential, while ABSA Bank took the top position in the Franchise Value Rankings for displaying a broad and comprehensive business strength and having a better capacity to generate profits from its core business. ABSA Bank also recorded an improvement in the overall ranking, coming in 2nd, mainly on the back of the bank having the lowest NPL ratio of the listed banks at 7.9%, coupled with an improvement in the bank’s Cost to Income ratio, which recorded a 5.8% points decline to 55.5% from 61.3% recorded in Q1’2021. Standard Chartered Bank’s rank improved to position 6 from position 9 in Q1’2021, attributable to a 0.2% decline in its Cost to Income ratio, which contributed to an increase in the bank’s franchise value score, coupled with the bank’s NPL coverage of 80.1%, which was the highest in the listed banking sector. Stanbic Bank’s rank declined to Position 7 from Position 4 in Q1’2021, attributable to a 1.7% points reduction in the bank’s Net Interest Margin to 4.4% from 6.1% in Q1’2021, coupled with a 12.7% points decline in the bank’s NPL coverage to 51.2%, from 63.9% in Q1’2020, and, HF came in 10th position on the back of weak franchise rankings scores as well as a non-promising future growth opportunity perspective as a result of lack of a proper cost efficiency structure.
Table 1: Listed Banks Franchise and Intrinsic Ranking
The table below ranks banks based on franchise and intrinsic ranking which compares metrics for efficiency, asset quality, diversification, growth, and profitability, among other metrics.
|
Bank |
Franchise Value Rank |
Intrinsic Value Rank |
Weighted Rank |
Q1'2021 |
H1'2021 |
|
I&M Group |
2 |
1 |
1.4 |
1 |
1 |
|
ABSA |
1 |
2 |
1.6 |
5 |
2 |
|
KCB Group Plc |
3 |
3 |
3.0 |
2 |
3 |
|
Equity Group Holdings Ltd |
5 |
5 |
5.0 |
3 |
4 |
|
NCBA Group Plc |
8 |
4 |
5.6 |
5 |
5 |
|
SCBK |
6 |
6 |
6.0 |
9 |
6 |
|
Stanbic Bank/Holdings |
4 |
8 |
6.4 |
4 |
7 |
|
Co-operative Bank of Kenya |
7 |
7 |
7.0 |
8 |
8 |
|
DTBK |
9 |
9 |
9.0 |
7 |
9 |
|
HF Group Plc |
10 |
10 |
10.0 |
10 |
10 |
*Market Cap Weighted as at 9th September 2021
Table 2: Cytonn’s H1’2021 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 |
|
ABSA |
846.0% |
(0.8%) |
(20.4%) |
6.1% |
7.0% |
6.1% |
32.8% |
10.7% |
6.1% |
(9.4%) |
82.9% |
8.4% |
19.3% |
|
KCB |
101.9% |
13.9% |
3.8% |
17.2% |
8.7% |
5.9% |
28.9% |
(2.2%) |
3.7% |
2.2% |
77.2% |
8.4% |
19.2% |
|
Equity |
97.7% |
30.3% |
42.0% |
26.5% |
7.6% |
44.2% |
40.0% |
42.5% |
50.7% |
11.8% |
61.6% |
28.9% |
21.4% |
|
NCBA |
76.9% |
8.7% |
(4.4%) |
19.7% |
0.4% |
6.2% |
44.4% |
(1.0%) |
12.0% |
12.90% |
54.8% |
(3.5%) |
9.1% |
|
SCBK |
37.5% |
(7.5%) |
(24.5%) |
(3.0%) |
6.4% |
13.5% |
35.4% |
19.8% |
8.5% |
(3.2%) |
46.80% |
(3.0%) |
13.70% |
|
Stanbic |
37.2% |
2.1% |
(9.9%) |
9.5% |
4.4% |
10.5% |
44.3% |
3.0% |
(9.4%) |
(2.7%) |
79.9% |
(11.7%) |
11.9% |
|
I&M |
32.2% |
11.6% |
(6.9%) |
28.1% |
5.7% |
(6.4%) |
30.5% |
(6.4%) |
9.6% |
43.30% |
73.9% |
10.8% |
14.5% |
|
DTBK |
20.1% |
5.7% |
5.7% |
5.7% |
5.2% |
5.5% |
25.3% |
(0.9%) |
11.9% |
19.7% |
65.1% |
1.4% |
6.4% |
|
Co-op |
2.3% |
19.0% |
20.9% |
18.3% |
8.6% |
24.3% |
35.4% |
17.8% |
6.0% |
48.7% |
73.9% |
10.7% |
12.7% |
|
HF Group |
(17.4%) |
(15.8%) |
(22.3%) |
(6.8%) |
4.2% |
13.8% |
26.1% |
34.6% |
(3.5%) |
1.9% |
93.3% |
7.5% |
(21.2%) |
|
H1'21 Mkt Weighted Average* |
136.0% |
15.0% |
10.8% |
17.6% |
7.4% |
19.2% |
35.6% |
16.6% |
18.4% |
12.4% |
68.8% |
11.7% |
16.9% |
|
H1'20 Mkt Weighted Average** |
(33.6%) |
10.4% |
10.0% |
10.9% |
7.0% |
(1.1%) |
35.2% |
(3.4%) |
18.5% |
25.9% |
71.5% |
14.5% |
15.4% |
|
*Market cap weighted as at 09/09/2021 |
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|
**Market cap weighted as at 28/08/2020 |
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Key takeaways from the table above include:
- For the first half of 2021, core Earnings per Share (EPS) recorded a weighted average growth of 136.0%, compared to a weighted average decline of 33.6% in H1’2020 for the listed banking sector. The performance is however largely skewed by the strong performance from ABSA, KCB and Equity Group of 846.0%, 101.9% and 97.7%, respectively,
- The Banks have recorded a weighted average deposit growth of 18.4%, a decline from the 18.5% recorded in H1’2020,
- Interest expense grew at a faster pace, by 10.8%, compared to the 10.0% growth in H1’2020 while cost of funds declined, coming in at a weighted average of 2.5% in H1’2021, from 2.9% in H1’2020, owing to the faster growth in average interest-bearing liabilities, an indication that the listed banks were able to mobilize cheaper deposits,
- Average loan growth came in at 11.7%, lower than the 14.5% growth recorded in H1’2020. The loan growth was also outpaced by the 12.4% growth in government securities, an indication that the banks’ are still taking a cautious approach when it comes to lending,
- Interest income grew by 15.0%, compared to a growth of 10.4% recorded in H1’2020. Notably, the weighted average Yield on Interest Earning Assets (YIEA) for the listed banks increased to 9.9%, from the 9.7% recorded in H1’2020 for the listed banking sector, an indication of the increased allocation to higher-yielding government securities by the sector during the period. Consequently, the Net Interest Margin (NIM) now stands at 7.4%, a 0.4% points increase from the 7.0% recorded in H1’2020 for the listed banking sector, and,
- Non-Funded Income grew by 19.2%, compared to the 1.1% decline recorded in H1’2020. This can be attributable to the faster growth in the fees and commission which grew by 16.6% compared to a decline of 3.4% in H1’2020, and points to the diversification of income in the banking sector.
You can access the video to the report release here and here
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.
