Following the release of the Q1’2024 results by Kenyan listed banks, the Cytonn Financial Services Research Team undertook an analysis on the financial performance of the listed banks and identified the key factors that shaped the performance of the sector. For the earnings notes of the various banks, click the links below:

1. Equity Group Q1’2024 Earnings Note
2. KCB Group Q1’2024 Earnings Note
3. Standard Chartered Bank Kenya Q1’2024 Earnings Note
4. ABSA Bank Kenya Q1’2024 Earnings Note
5. NCBA Group Q1’2024 Earnings Note
6. Co-operative Bank Q1’2024 Earnings Note
7. Diamond Trust Bank Kenya (DTB-K) Q1’2024 Earnings Note
8. I&M Group Holdings Q1’2024 Earnings Note
9. Stanbic Holdings Q1’2024 Earnings Note
10. HF Group Q1’2024 Earnings Note

The core earnings per share (EPS) for the listed banks recorded a weighted growth of 29.8% in Q1’2024, compared to a weighted growth of 25.0% recorded in Q1’2023, an indication of sustained performance supported by improved operating environment experienced in Q1’2024 on the back of easing inflationary pressures and a strengthening Shilling. Notably, the inflation rate in Q1’2024 averaged 6.3%, 2.8% points lower than the 9.1% average in Q1’2023, with the Kenyan Shilling having appreciated by 15.8% against the USD in Q1’2024. The performance in Q1’2024 was supported by a 22.8% growth in net interest income coupled with a 10.9% growth in non-funded income. The softer growth in NFI was partly driven by the decrease in foreign exchange income recorded by the banks during the period as a result of decreased dollar demand in the country. Additionally, the asset quality of listed banks deteriorated, with the weighted average Gross Non-Performing Loan ratio (NPL) increasing by 0.9% points to 13.5%, from 12.6% recorded in Q1’2023. The performance remained 2.5% points above the ten-year average of 11.0%.

The report is themed “Improved Profitability Owing to Strengthened Business Environment” where we assess the key factors that influenced the performance of the banking sector in Q1’2024, the key trends, the challenges banks faced, and areas that will be crucial for growth and stability of the banking sector going forward. As such, we shall address the following:

1. Key Themes that Shaped the Banking Sector Performance in Q1’2024,
2. Summary of the Performance of the Listed Banking Sector in Q1’2024,
3. The Focus Areas of the Banking Sector Players Going Forward, and,
4. Brief Summary and Ranking of the Listed Banks based on the outcome of our analysis

Section I: Key Themes That Shaped the Banking Sector Performance in Q1’2024

In this section, we will highlight the main factors influencing the banking sector in Q1’2024. These include regulation, digitization, interest rates, regional expansion through mergers and acquisitions, and asset quality:

1. Regulation:

1. Risk-based Lending: Over the years, the government has used various policy tools to curb the increasing interest rates and promote access to credit by the private sector. As such, after the repeal of the Interest Cap Law in 2019, the Central Bank of Kenya (CBK) intervened administratively by halting banks from repricing their loans. Instead, banks were required to develop and submit new risk-based lending formulas for approval. The model's primary purpose is to instill fairness and transparency in the credit pricing decisions as it allows Banks to price based on a customer’s risk profile. This represents a shift from the traditional practice of rejecting loan applicants solely based on their credit scores. The new credit scoring system primarily targets borrowers with higher risks, many of whom are micro, small, and medium-sized enterprises facing challenges in accessing traditional credit. As of June 2023, 33 out of the 38 banks in the country had their models approved by the CBK, with Equity Bank being the first commercial bank to implement risk-based lending. However, the approval process of the models has been gradual in a bid to avoid causing distress to customers through high interest rates. Further, the full deployment has been slowed due to inadequate data to analyse the client's risk profile,

2. Digitization: In Q1'2024, digitization continued to be a transformative force in the banking sector, significantly improving how banks operate and deliver services. There has been a significant increase in the adoption of mobile and online banking platforms as customers now prefer to perform banking transactions from the comfort of their homes, leading to a decline in the use of physical branches. For instance, most of the listed banks disclosed that the majority of transactions were conducted through alternative channels, with KCB Group and Cooperative Bank reporting that 99.0% and 93.0% of their transactions, respectively, were done through non-branch channels in Q1’2024,

3. Interest Rates: Interest rates remained high in Q1'2024 compared to the same period in 2023. Notably, the yields on Kenyan government securities were on an upward trajectory in Q1'2024, with the yield on the 91-day paper averaging 16.7% during the quarter, 7.1% points higher than the average of 9.6% in Q1'2023. The elevated rates led to a significant increase in the listed bank’s interest income, rising to a weighted average of 35.3% in Q1'2024 from a weighted average of 26.2% in Q1'2023. Additionally, interest expense increased to a weighted average of 64.7% in Q1'2024, up from 40.2% in Q1'2023,

4. Regional Expansion through Mergers and Acquisitions: Kenyan banks are looking at having an extensive regional reach. In Q1’2024, there was one acquisition agreement announcement between Access Bank plc and KCb Group:

1. On March 20, 2024 Access Bank Plc announced that it had entered into a share purchase agreement with KCB Group Plc that would allow Access Bank Plc to acquire 100% shareholding in National Bank of Kenya Limited (NBK) from KCB. Access Bank Plc is a wholly owned subsidiary of Access Holdings Plc listed on the Nigerian Exchange as Access Corporation. Notably, KCB Bank had acquired the National Bank of Kenya back in 2019 in a rescue deal that was supervised by the Central Bank of Kenya. The announcement follows the release of the FY’2023 results for the KCB group, which revealed a decline in earnings with its Core earnings per share (EPS) declining by 8.3% to Kshs 11.7, from Kshs 12.7 in FY’2022. The transaction represents an important milestone for Access Bank as it moves closer to the achievement of its five-year strategic plan through increased scale in the Kenyan market. In the signed deal, Access Bank will pay multiples of 1.3x the book value of NBK, which stood at Kshs 10.6 bn as of end December 2023. This values the deal at about Kshs 13.3 bn with the actual figure to be announced when the transaction is completed. For more information, please see our Cytonn Weekly #12/2024,
2. In April 2024, Sidian Bank disclosed that the founders of the bank and other nine individual shareholders relinquished a combined stake of 728,525 shares representing 16.6% stake to Pioneer General Insurance Limited, pioneer Life Investments Limited, Wizro Enterprises Limited, Afrah Limited, and Telesec Africa Limited. The transaction amounted to Kshs 0.8 bn translating to a price to book multiple (p/bv) of 1.0x. This follows an earlier transaction executed on October 2023 when Pioneer General Insurance, Wizpro Enterprise and Afram Limited bought 38.9% stake in the lender following a shareholders’ resolution passed on 20^th September 2023 approving the sale.

The following are Mergers and Acquisitions that were completed in 2023:

1. On January 30, 2023, the Central Bank of Kenya (CBK) announcedthat Commercial International Bank (Egypt) S.A.E (CIB) had completed the acquisition of an additional 49.0% shareholding of Mayfair CIB Bank Limited (MBL) at Kshs 5.0 bn following the earlier acquisition of 51.0% stake in MBL announced in April 2020. Consequently, MBL is now a fully owned subsidiary of CIB,
2. On January 30, 2023, Equity Group Holdings , through Equity Bank Kenya Limited (EBKL) announced that it had completed the acquisition of certain assets and liabilities of the local Bank, Spire Bank Limited after obtaining all the required regulatory approvals. The completion of the acquisition followed the Assets and Liabilities Purchase Agreement, which was announced in September 2022, as highlighted in our Cytonn Weekly #37/2022. As such, Equity Bank Kenya Limited took over Spire Bank’s 12 branches as well as all existing depositors in Spire Bank, other than remaining deposits from its largest shareholder, Mwalimu Sacco. For more information, please see our Cytonn Monthly-January 2023,
3. On March 17, 2023, the Central Bank of Kenya (CBK) announced that Premier Bank Limited Somalia (PBLS) had completed the acquisition of 62.5% shareholding of First Community Bank Limited (FCB) effective 27 March 2023. This came after receiving regulatory approvals from the CBK and the Cabinet Secretary for the National Treasury. FCB, which has been in operation since June 2008, is classified as a tier 3 bank in Kenya with 18 branches and a market share of 0.3% as at December 2022. The acquisition by Premier Bank Limited Somalia (PBLS), came at a time when FCB has been struggling to meet regulatory Capital adequacy requirements. For more information, please see our Cytonn Weekly #11/2023,
4. On May 22, 2023, the Central Bank of Kenya (CBK) announced that Shorecap III, LP, a Private Equity fund governed by the laws of Mauritius, had acquired a 20.0% stake in Credit Bank Plc. The fund is managed by Equator Capital Partners LLC and the acquisition took effective from June 15, 2023. While the CBK did not reveal the value of the deal, Shorecap III, LP will assume control of 7,289,928 ordinary shares, which make up 20.0% of the Bank’s ordinary shares. For additional details, refer to our Cytonn Weekly #21/2023,
5. On December 1, 2023 Equity Group Holdings Plc (EGH) announced that it had successfully completed the acquisition of its Rwandan Subsidiary, Compagnie Générale de Banque (Cogebanque) Plc, marking a significant milestone in its regional expansion strategy. Equity Group now holds 198,250 shares representing 99.1% of the issued share capital of COGEBANQUE, following receipt of all regulatory and corporate approvals, officially making COGEBANQUE its subsidiary. EGH made the announcement it had entered into a binding agreement with the Government of Rwanda, Rwanda Social Security Board, and other investors of Compagnie Generale De Banque (Cogebanque) Plc Limited to acquire a 91.9% stake in the Rwanda based lender on June 14, 2023. Notably, EGH signed a share purchase agreement with the Sellers on July 28, 2023, committing to buy 183,854 shares at a rate of 297,406 Rwandan Francs per share upon completion on December 1, 2023, giving EGH ownership of 99.1% of the issued share capital. Concurrently, EGH proposed to purchase all outstanding shares from the other shareholders of Cogebanque, aiming to own up to 100% of Cogebanque’s issued shares,

Below is a summary of the deals in the last 10 years that have either happened, been announced or expected to be concluded:

In Q1’2024, the average acquisition valuations for banks have remained unchanged at 1.3x, similar to what was recorded in Q1’2023. As such, the valuations still remain low compared to historical prices paid, as highlighted in the chart below;

*Figure as of end Q1’2024

As at the end of Q1’2024, the number of commercial banks in Kenya stood at 38, same as in Q1’2023 but lower than the 43 licensed banks in FY’2015. The ratio of the number of banks per 10 million population in Kenya now stands at 6.8x, which is a reduction from 9.0x in FY’2015, demonstrating continued consolidation in the banking sector. However, despite the ratio improving, Kenya still remains overbanked as the number of banks remains relatively high compared to the African major economies. To bring the ratio to 5.5x, we ought to reduce the number of banks from the current 38 banks to about 30 banks. For more on this see our topical.The chart below shows the commercial bank ratio per 10 million people across select African nations in comparison to Kenya;

Source: World Bank, Central Bank of Kenya, South Africa Reserve Bank, Central Bank of Nigeria

5. Asset Quality: Asset quality for listed banks deteriorated in Q1’2024, with the weighted average Gross Non-Performing Loan ratio (NPL) increasing by 0.9% points to 13.5%, from 12.6% recorded in Q1’2023. The performance remained 2.5% points above the ten-year average of 11.0%. The deterioration in asset quality in Q1’2024 was mainly driven by the 4.2% points increase in Equity Group’s NPL ratio to 14.2%, from 10.0% in Q1’2023, coupled with the 4.2% points increase in HF Group’s NPL ratio to 24.1% from 19.9% in Q1’2023. The deterioration in Equity Group asset quality was mainly attributable to 50.0% increase in Gross non-performing loans to Kshs 120.4 bn in Q1’2024 from Kshs 80.3 bn in Q1’2023, which outpaced the 5.4% increase in gross loans to Kshs 849.4 bn from Kshs 806.1 bn recorded in Q1’2023. The chart below highlights the asset quality trend for the listed banks:

However, the deterioration in listed banks asset quality was mitigated by an improvement in Standard Chartered Bank’s Asset quality, with Gross NPL ratio decreasing by 4.5% points to 9.9% in Q1’2024 from 14.4% in Q1’2023, attributable to the 26.9% decrease in gross non-performing loans to Kshs 16.5 bn, from Kshs 22.6 bn in Q1’2023, compared to the 6.8% increase in gross loans to Kshs 167.4 bn, from Kshs 156.7 bn recorded in Q1’2023. A total of three out of the ten listed Kenyan banks recorded improvement in asset quality, owing to the improvement in the economic environment as evidenced by the Q1’2024 Purchasing Managers Index (PMI) which averaged at 50.3 which was above the 50.0 points no change threshold, and above the 49.3 average in Q1’2023. Going forward, we expect credit risk to decline gradually but remain at relatively elevated levels compared to previous years mainly on the back of the improved business environment owing to the eased inflationary pressures as well as the appreciation of the Kenya shilling.

The table below highlights the asset quality for the listed banking sector:

Key take-outs from the table include;

1. Asset quality for the listed banks deteriorated in Q1’2024, with market weighted average NPL increasing by 0.9% points to 13.5% from a 12.6% in Q1’2023. The worsening of asset quality was mainly driven by a deterioration in Equity Group, HF Group, Diamond trust Bank, Coop Bank and ABSA Bank Kenya’s asset quality with their NPL ratio increasing by 4.2%, 4.2%, 2.7%, 1.8% and 1.6% points respectively,
2. Equity Group and HF Group had the highest NPL ratio jumps by 4.2% points each to 14.2% and 24.1%, from 10.0% and 19.9% respectively in Q1’2023. Equity Group’s increase in NPL ratio was attributable to 50.0% increase in Gross non-performing loans to Kshs 120.4 bn in Q1’2024 from Kshs 80.3 bn in Q1’2023, which outpaced the 5.4% increase in gross loans to Kshs 849.4 bn from Kshs 806.1 bn recorded in Q1’2023, and,
3. Market weighted average NPL Coverage for the listed banks decreased marginally by 1.0% points to 62.7% in Q1’2024, from 63.7% recorded in Q1’2023, majorly on the back of decreased NPL coverage recorded by I&M Holdings, HF Group, Equity Group, Co-op Bank, Standard Chartered Bank, Diamond trust Bank and ABSA Bank of Kenya by 7.5%, 7.0%, 3.8%, 3.6%, 3.1%, 1.8% and 1.6% points respectively in Q1’2024. However, the NPL coverage ratios of Stanbic bank and KCB Group increased by 5.6% points and 4.8% points to 72.3% and 74.4% respectively in Q1’2024.

Section II: Summary of the Performance of the Listed Banking Sector in Q1’2024:

The table below highlights the performance of the banking sector, showing the performance using several metrics, and the key take-outs of the performance;

Key takeaways from the table include:

1. The listed banks recorded an 29.8% growth in core Earnings per Share (EPS) in Q1’2024, compared to the weighted average growth of 25.0% in Q1’2023, an indication of sustained performance supported by improved operating environment experienced in Q1’2024 on the back of easing inflationary pressures and a strengthening Shilling. The performance during the period was mainly supported by a 22.8% weighted average growth in net interest income, coupled with a 10.9% weighted average growth in non-funded income,
2. Growth in government securities investments by listed banks increased in Q1’2024, having recorded a market-weighted average growth of 3.1%, from the 1.2% growth decline recorded in Q1’2023, with 5 of the 10 listed banks recording an improvement in government securities investments. The improved investment in Kenya government securities was partly attributable to the reduced perceived risk of default by the government, following the February Eurobond buyback which removed default risk of the June 2024 Eurobond maturity by the government,
3. The listed banks’ Net loans and advances to customers recorded a weighted average growth of 7.5% in Q1’2024, a decline from the 19.6% growth recorded in Q1’2023, an indication of decreased lending attributable to the elevated credit risk following the continued implementation of risk-based lending by the banks and increased borrowing costs,
4. Interest income recorded a weighted average growth of 35.3% in Q1’2024, compared to 26.2% in Q1’2023. Similarly, interest expenses recorded a market-weighted average growth of 64.7% in Q1’2024 compared to a growth of 40.2% in Q1’2023. Consequently, net interest income recorded a weighted average growth of 22.8% in Q1’2024, an increment from the 20.1% growth recorded in Q1’2023,
5. Notably, non-funded income growth softened during the quarter, as evidenced by non-funded income weighted average growth of 10.9% in Q1’2024 compared to a weighted average growth of 48.1% in Q1’2023. The performance was largely supported by the decrease in foreign exchange income recorded by the banks during the period as a result of decreased dollar demand in the country. Additionally, listed banks recorded a weighted average growth of 10.7% in total fees and commissions income in Q1’2024 compared to a weighted growth of 30.0% in Q1’2023, and,
6. The listed banks recorded a 21.9% weighted average growth on return on average equity (RoaE), 0.2% points lower than the 22.1% growth registered in Q1’2023. Additionally, the entire banking sector’s Return On Equity (ROE) stood at 0% as of December 2023, a 2.0% points decrease from the 25.0% recorded in September 2023. On a global level, the Kenyan banking sector continues to record high profitability compared to other economies in the world, as highlighted in the chart below:

Source: Cytonn research, * Figure as of December 2023

Section III: The Focus Areas of the Banking Sector Players Going Forward:

The banking sector continues to remain resilient despite the tough operating environment as evidenced by the increase in their profitability, with the Core Earnings Per Share (EPS) growing by 29.8%, as banks continued to implement their revenue diversification strategies. Notably, 7 out of the 10 listed banks recorded a significant growth in their Non-funded income in Q1’2024. Additionally, we believe that the possibly improved business environment occasioned by ease in inflationary pressures and a stronger Shilling, coupled with the end of the uncertainty surrounding the June 2024 Eurobond Maturity following the buyback, will see banks start to decrease their provisioning to cushion themselves from credit risk. To note, growth in general provisions for the listed banks recorded a reduced weighted average growth of 14.5% in Q1’2024, compared to a growth of 20.3% in FY’2023.  Based on the current operating environment, we believe the future performance of the banking sector will be shaped by the following key factors:

1. Growth in Interest income:  Going forward, we expect interest income growth to remain a key driver in the banking industry, evidenced by the significant 29.8% growth recorded in Q1’2024, higher than the 25.0% growth recorded in Q1’2023, partly on the back of continued high borrowing costs. Furthermore, the continued approval of banks’ risk-based lending models will enable banks to effectively price their risk, expand loan books, and consequently increase their interest income,
2. Revenue Diversification: In Q1’2024, non-funded income (NFI) recorded a 10.9% weighted average growth, slower than the 48.1% weighted growth in Q1’2023 with 7 out of the 10 listed Banks recording an increase in their non-funded income. As a result of the reduced growth in non-funded income, the weighted average contribution of NFI to total operating income came in at 38.6% in Q1’2024, 2.7% points lower than the 41.3% weighted average growth contribution recorded in Q1’2023. As such, there exists an opportunity for the sector to further increase NFI contributions to revenue given the continuous adoption of digitization, and,
3. Regional Expansion and Further Consolidation: Consolidation remains a key theme going forward with the current environment offering opportunities for larger banks with a sufficient capital base to expand and take advantage of the market's low valuations, as well as further consolidate out smaller and weaker banks. Notably, the majority of the bigger banks have continued to cushion over unsystematic risks specific to the local market by expanding their operations into other African nations. Banks such as KCB and Equity Group have been leveraging on expansion and consolidation which has largely contributed to their increased asset base as well as earnings growth. As aforementioned, Equity Group recently announced the completion of the acquisition of Compagnie Générale de Banque (Cogebanque) Plc, marking a significant milestone in its regional expansion strategy. As such, we expect to see a continued expansion trend aimed at revenue optimization.

Section IV: Brief Summary and Ranking of the Listed Banks:

As per our analysis of the banking sector from a franchise value and a future growth opportunity perspective, we carried out a comprehensive ranking of the listed banks. For the franchise value ranking, we included the earnings and growth metrics as well as the operating metrics shown in the table below in order to carry out a comprehensive review of the banks:

The overall ranking was based on a weighted average ranking of Franchise value (accounting for 60.0%) and intrinsic value (accounting for 40.0%). The Intrinsic Valuation is computed through a combination of valuation techniques, with a weighting of 40.0% on Discounted Cash-flow Methods, 35.0% on Residual Income, and 25.0% on Relative Valuation, while the Franchise ranking is based on a bank’s operating metrics, meant to assess efficiency, asset quality, diversification, and profitability, among other metrics. The overall Q1’2024 ranking is as shown in the table below:

Major Take-outs from the Q1’2024 Ranking are:

1. ABSA Bank moved to position 1 in Q1’2024, from position 2 in Q1’2023, mainly supported by strong franchise and intrinsic value score, attributable to improvement in the bank’s management quality and earning quality, with the cost-to-income ratio with LLPs declining by 5.2% points to 48.5% in Q1’2024, from 53.7% in Q1'2023, and cost-to-income without LLPs declined by 2.4% points to 33.9% in Q1’2024, from 36.3% in Q1'2023. Notably, the bank’s Net Interest Margin increased by 1.3% points to 9.7% in Q1’2024 from 8.3% in Q1’2023,
2. Standard Chartered Bank climbed up 5 places to rank at position 3 in Q1’2024, up from position 8 in Q1’2023 supported by significant improvement in franchise value score. Its performance was driven by a 1.0% points growth in return on average equity to 24.0% in Q1’2024 from 23.0% in Q1’2023. Additionally, the cost-to-income ratio with LLPs declined by 6.1% points to 41.6% in Q1’2024, from 47.6% in Q1’2023, while cost-to-income ratio without LLPs declined by 2.9% points to 37.4% in Q1’2024, from 40.3% in Q1’2023. Notably, the bank’s Net Interest Margin increased by 1.3% points to 8.6% in Q1’2024 from 7.3% in Q1’2023,
3. Stanbic Bank also climbed up 4 places to rank at position 2 in Q1’2024, up from position 6 in Q1’2023 supported by significant improvement in both franchise and intrinsic value score. Its performance was driven by a 0.1% points growth in return on average equity to 20.8% in Q1’2024 from 20.7% in Q1’2023. Additionally, the cost-to-income ratio with LLPs declined by 3.9% points to 46.8% in Q1’2024, from 50.7% in Q1’2023, while cost-to-income ratio without LLPs declined by 4.8% points to 35.7% in Q1’2024, from 40.5% in Q1’2023. Notably, the bank’s Net Interest Margin increased by 1.2% points to 8.4% in Q1’2024 from 7.2% in Q1’2023, and,
4. KCB Group slid 5 places to rank at position 9 in Q1’2024, down from position 4 in Q1’2023, supported by deterioration in earnings quality, with the return on average equity deteriorating by 0.8% points to 20.1% in Q1’2024 from 20.9% recorded in Q1’2023. Additionally, the asset quality worsened with the gross NPL ratio increasing by 0.8% points to 17.9% in Q1’2024, up from 17.1% registered in Q1’2023.

For more information, see our Cytonn Q1’2024 Listed Banking Sector Review full report.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.