NAIROBI, KENYA, June 18th, 2018Cytonn Investments has today released its Q1’2018 Banking Sector Report, which ranks KCB Group as the most attractive bank in Kenya, a position it has retained since 2015, supported by a strong franchise value and intrinsic value score. 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. National Bank of Kenya ranked lowest overall, ranking last in the intrinsic value score.
“The Kenyan banking sector has witnessed a challenging operating environment, following the capping of interest rates, coupled with tighter regulation. The report, themed ‘Diversification and efficiency key to growth amidst tighter regulation. Asset quality remains a concern’, analyzed the results of the listed banks using their Quarter 1 2018 audited results so as to determine which banks are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective,” said Maurice Oduor, Cytonn’s Senior Investments Manager. “Banks will continue to put more emphasis on alternative revenue streams to boost their Non-Funded Income and adopt an efficient operating model through alternative banking channels and digitization in order to remain profitable under the tough operating environment”, added Maurice. “We have looked at three key focus areas, which are regulation, diversification and asset quality in this report. With a tighter regulated environment following the capping of interest rates and adoption of IFRS 9, revenue sources diversification and asset quality management will prove to be the key growth drivers in the banking sector.”
“We expect the relatively challenging operating environment for the banking sector to persist in 2018, especially with the coming into effect of IFRS 9, which takes a forward-looking approach to credit assessment, which will likely reduce capital positions for banks with poor asset quality as they have to set aside provisions for both the performing and non-performing loans. This will likely impact negatively these banks’ earnings.” said Caleb Mugendi, Senior Investment Analyst at Cytonn Investments. “With the deteriorating asset quality, evidenced by the rising non-performing loans, we expect banks to be more prudent in loan disbursement, and consequently tightening their credit standards, in order to address the concerns around asset quality and enhance cost rationalization measures, in a bid to protect their profitability. We have seen banks adjusting their business models with lending skewed mainly towards collateralized lending,” added Caleb.
KCB Group ranked 1st position on the back of a high return on average equity of 20.3% compared to an industry average of 18.4%, as well as an optimal loan to deposit ratio of 84.3%, compared to an industry average of 76.8%. Equity Group ranked 2nd, recording the highest return on equity at 24.7% and had the best asset quality, with the lowest Non-Performing Loans ratio of 6.5% compared to the industry average at 9.5%. Equity Bank’s ranking was largely pulled back by its expensive market valuation of 2.5x, compared to an industry average of 1.6x or KCB Group’s 1.5x.
Diamond Trust Bank climbed 3 spots to Position 4 from Position 7 in our FY’2017 Banking Sector Report, owing to its good asset quality, with the bank having the second lowest gross NPL ratio at 7.1%, lower than industry average of 9.5%, and good corporate governance structure, ranking second in the Cytonn Corporate Governance Index (CGI).
Kenya’s listed banks recorded a 14.4% growth in core EPS growth in Q1’2018, compared to a decline of 8.6% in Q1’2017, and a 5-year average growth of 6.7%. Only Standard Chartered Bank and Housing Finance Group recorded declines in core EPS, registering declines of 12.5% and 58.4%, respectively. Deposits grew at 9.4% y/y, a faster rate than loans, which grew by 3.2%. The loan growth came in lower as private sector credit growth remained low at an average of 2.4%, below the five-year average of 14.0%, with banks adopting a more prudent credit risk assessment framework to ensure quality loan books so as to manage the rising non-performing loans.
Table 1: Cytonn’s Q1’2018 Banking Report Rankings
|
CYTONN’S Q1’2018 BANKING REPORT RANKINGS |
|||||
|
Bank |
Franchise Value Total Score |
Intrinsic Value Score |
Weighted Score |
Q1‘2018 Rank |
FY‘2017 Rank |
|
KCB Group |
53.0 |
4.0 |
23.6 |
1 |
1 |
|
Equity Group |
53.0 |
8.0 |
26.0 |
2 |
2 |
|
I&M Holdings |
62.0 |
3.0 |
26.6 |
3 |
3 |
|
Diamond Trust Bank |
66.0 |
2.0 |
27.6 |
4 |
7 |
|
Barclays Bank |
63.0 |
6.0 |
28.8 |
5 |
6 |
|
Co-operative Bank |
63.0 |
7.0 |
29.4 |
6 |
4 |
|
Stanbic Holdings |
69.0 |
10.0 |
33.6 |
7 |
9 |
|
NIC Group |
83.0 |
1.0 |
33.8 |
8 |
5 |
|
Standard Chartered Bank |
71.0 |
9.0 |
33.8 |
8 |
8 |
|
HF Group |
104.0 |
5.0 |
44.6 |
10 |
11 |
|
National Bank of Kenya |
103.0 |
11.0 |
47.8 |
11 |
10 |
Source: Cytonn Research
Table 2: Cytonn’s Q1’2018 Listed Banks Earnings and Growth Metrics
|
Bank |
Core EPS Growth |
Interest Income Growth |
Interest Expense Growth |
Cost of Funds |
Net Interest Income Growth |
Net Interest Margin |
Non-Funded Income (NFI) Growth |
NFI to Total Operating Income |
Growth in Total Fees & Commissions |
Deposit Growth |
Loan Growth |
Growth in Govt. Securities |
IFRS 9 Capital Ratios Effect |
|
National Bank |
348.0% |
(14.2%) |
(11.7%) |
3.3% |
(15.8%) |
7.1% |
(12.3%) |
31.0% |
91.3% |
(6.3%) |
(12.0%) |
(9.8%) |
(0.6%) |
|
Stanbic |
79.0% |
17.7% |
17.4% |
3.3% |
17.9% |
7.0% |
55.4% |
49.0% |
73.7% |
13.2% |
11.4% |
83.5% |
(0.6%) |
|
Equity Group |
21.7% |
10.5% |
10.5% |
2.7% |
10.5% |
8.4% |
6.3% |
49.0% |
7.2% |
10.0% |
3.5% |
45.5% |
(0.5%) |
|
KCB Group |
14.0% |
10.9% |
13.0% |
3.1% |
10.0% |
8.2% |
(1.1%) |
32.8% |
(2.3%) |
8.7% |
5.8% |
(10.7%) |
(0.8%) |
|
Barlays Bank |
7.7% |
8.1% |
6.8% |
2.9% |
8.5% |
9.6% |
5.0% |
29.2% |
(6.7%) |
8.4% |
(1.9%) |
35.3% |
1.00% |
|
Co-op Bank |
6.8% |
9.1% |
5.0% |
4.0% |
10.8% |
8.6% |
3.8% |
32.0% |
9.6% |
5.7% |
2.8% |
21.3% |
(0.9%) |
|
DTB |
3.0% |
4.9% |
4.2% |
5.1% |
5.4% |
6.4% |
4.4% |
22.0% |
8.3% |
11.6% |
3.0% |
16.0% |
(1.6%) |
|
NIC Group |
2.2% |
8.2% |
35.9% |
5.2% |
(8.3%) |
6.3% |
5.5% |
29.6% |
1.8% |
22.1% |
(0.4%) |
81.2% |
(0.8%) |
|
I&M holdings |
1.8% |
2.5% |
10.9% |
4.8% |
(2.7%) |
7.4% |
43.9% |
37.0% |
45.9% |
3.5% |
7.6% |
(1.7%) |
(0.2%) |
|
Stanchart |
(12.5%) |
7.7% |
16.4% |
3.6% |
4.5% |
7.8% |
6.5% |
32.0% |
27.0% |
13.2% |
(2.6%) |
12.4% |
(0.5%) |
|
HF Group |
(58.4%) |
(12.8%) |
(13.0%) |
7.2% |
(12.6%) |
5.1% |
64.2% |
28.9% |
(62.7%) |
(6.1%) |
(12.5%) |
(41.4%) |
0.0% |
|
Weighted Average Q1'2018 |
14.4% |
9.3% |
11.4% |
3.4% |
8.1% |
8.1% |
9.5% |
37.1% |
12.2% |
9.4% |
3.2% |
25.0% |
(0.3%) |
|
Weighted Average Q1'2017 |
(8.6%) |
(11.6%) |
(10.3%) |
3.0% |
(10.1%) |
9.2% |
18.6% |
37.8% |
8.7% |
11.7% |
7.1% |
43.1% |
- |
Source: Cytonn Research
Key takeaways from the table above include:
- The listed banks recorded a 14.4% increase in core EPS, compared to a decline of 8.6% decline in Q1’2017. Only Standard Chartered Bank and Housing Finance Group recorded declines in core EPS, registering declines of 12.5% and 58.4% respectively. HF Group recorded the biggest decline at 58.4%, on the back of a 12.6% decline in Net Interest Income (NII);
- Average deposit growth came in at 9.4%. Thus, the interest expense paid on deposits recorded a higher growth of 11.4% on average, indicating that banks are growing deposits by opening more interest earning accounts. This is also reflected by the increase in the cost of funds to 3.4% from 3.0% in Q1’2017;
- Average loan growth was recorded at 3.2%, with interest income increasing by 9.3%, as banks adapted to the interest rate Cap regime, with increased allocations in government securities;
- Investment in government securities has grown by 25.0%, outpacing loan growth of 3.2%, showing increased lending to the government by banks as they avoid the risky borrowers;
- The average Net Interest Margin in the banking sector currently stands at 8.1%, a decline from the 9.2% recorded in Q1’2017, and,
- Non-funded income has grown by 9.5%, which included a Fee and Commissions growth of 12.2%. This shows that banks are charging more fee income to improve their income on loans above the rate cap maximum;
- The sector saw a decline in total capital relative to risky assets by 0.3% due to the implementation of IFRS 9, indicating the implementation of the standard affected the sector’s capital position though not as much as expected. We expect this reduction to increase in the future.
