Kenya Listed Banks Q3’2023 Report

24 December, 2023

Following the release of the Q3’2023 results by Kenyan 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:

The core earnings per share (EPS) for the listed banks recorded a weighted growth of 11.2% in Q3’2023, compared to a weighted growth of 36.3% recorded in Q3’2022, an indication of sustained performance despite the tough operating environment occasioned by elevated inflationary pressures experienced during the period, with the inflation rate in the first nine months leading to end of Q3’2023 averaging 8.0%, which is higher than the 7.1% average recorded over a similar period in 2022. The performance in Q3’2023 was supported by a 21.3% growth in net interest income coupled with a 17.0% growth in non-funded income. The growth in NFI was largely driven by the increase in foreign exchange income recorded by the banks during the period as a result of increased dollar demand in the country. However, the asset quality of listed banks deteriorated, with the weighted average Gross Non-Performing Loan ratio (NPL) increasing by 0.9% points to 13.1%, from 12.2% recorded in Q3’2022. The performance remained 2.2% points above the ten-year average of 11.1%.

The report is themed “Sustained Profitability Despite a Challenging Business Environment”, and examines the primary elements that shaped the banking sector’s performance in Q3’2023. It highlights the prevailing trends, the obstacles encountered by banks, and the areas that will be vital for the sector’s future growth and stability. Consequently, we will discuss the following:

Key Themes that Shaped the Banking Sector Performance in Q3’2023,
Summary of the Performance of the Listed Banking Sector in Q3’2023,
The Focus Areas of the Banking Sector Players Going Forward, and,
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 Q3’2023

In this section, we underscore the principal themes that influenced the banking sector performance in Q3’2023. These encompass regulation, regional growth through mergers and acquisitions, and the quality of assets:

Regulation:
1. Risk based Lending: Following the scrapping of the Interest Cap Law in 2019, the Central Bank of Kenya (CBK) intervened administratively, stopping banks from reprising their loans and requiring them to submit new risk-based lending formulas for approval. The main aim of the risk-based lending model is to assist banks in making lending decisions based on the predicted risks associated with each loan applicant. This signifies a move from the traditional practice of blacklisting defaulters to a new credit scoring system that doesn’t reject loan applicants solely based on their credit bureau scores. This method primarily focuses on borrowers who pose higher risks, most of whom are involved in micro, small, and medium-sized enterprises that have had difficulties securing traditional credit. As of May 2023, 33 out of the 39 banks in the country had their models approved by the CBK, with Equity Bank being the first commercial bank to implement risk-based lending. The adoption of risk-based credit models has seen an increase in lending to the private sector, with the growth in credit to the private sector coming in at 12.2% in September 2023, 3.4% points above the five-year average rate of 8.8%. Consequently, the banking sector has reduced its appetite for government securities,
2. Changes to Interbank Foreign Exchange Market: In August 2023, the CBK issued a circular detailing several modifications to the interbank foreign exchange market operations. These changes included the removal of the tenor limit for swaps between residents, a rule that also applies to residents of the East African Community. For swaps that involve non-residents, a minimum tenor of 6 months was established. The regulator also permitted the use of Electronic Brokerage Systems and lowered the minimum trade amount in the interbank market from USD 500,000 to USD 250,000. These modifications have improved swap transactions, allowing banks to more effectively manage their exchange rate and interest rate risks, and to assume speculative positions,
3. Foreign Exchange Code: On March 22, 2023, the CBK introduced the Foreign Exchange Code (FX Code) to commercial banks. This was an effort to regulate the wholesale transactions in Kenya’s foreign exchange market. The decision was triggered by the significant fluctuations in the exchange rate spread in the market, as highlighted in our currency review note. The FX Code is designed to foster a strong and transparent foreign currency market by implementing certain reporting guidelines;
4. Compliance with FX Code- All market participants (commercial banks and foreign exchange brokers) were required to conduct a self-assessment and submit to the CBK a report on an institution’s their level of compliance with the FX Code by 30 April 2023, and submit a detailed compliance implementation plan that was to be approved by its Board by 30 June 2023. Each participant was required to be fully compliant with the aforementioned code by December 31, 2023,
5. Reporting Mechanism- All market participants will be required to submit a quarterly report to CBK, detailing their adherence to the FX Code within 14 days following the conclusion of each calendar quarter,
6. In the event of non-compliance- CBK may take appropriate enforcement and other administrative action including monetary penalties as provided for under the Banking Act against any market participant, and,
1. Prohibitive Practices- The FX Code aims to prevent market participants from engaging in disruptive practices such as quoting prices or moving prices in ways that create artificial delays, or misrepresent the market’s depth and liquidity. Such practices will incur severe sanctions. Moreover, market participants should not engage in position or points parking, which are fake transactions to hide positions or shift profits or losses.
Regional Expansion through Mergers and Acquisitions: Kenyan banks are continuously looking at having an extensive regional reach. In the first nine months leading to the end of Q3’2023, there were three completed acquisitions made by Commercial International Bank (Egypt) S.A.E (CIB), Equity Group Holdings Plc, and Premier Bank Limited Somalia as follows:
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 Plc., 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. This follows the acquisition of a 22.8% stake in the lender by Oikocredit in August 2019, for a cash consideration of Kshs 1.0 bn, with the transaction trading at a price to book (P/B) multiple of 1.5x. For additional details, refer to our Cytonn Weekly #21/2023,
5. On June 14, 2023, Equity Group Holdings Plc (EGH) announced that 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. Upon the completion of the acquisition, EGH plans to eventually merge the business of the Cogebanque with its Rwandan Subsidiary, Equity Bank Rwanda Plc. 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, and,
6. On September 27, 2023, the NCBA Group declared its plan to purchase a 100% share in AIG Insurance. AIG Insurance is a well-established company in Kenya, having been in operation for over 50 years, providing general insurance services to corporations, SMEs, and individuals. Currently, the NCBA Group holds a minority stake in AIG Insurance and intends to negotiate with AIG Inc, the majority stakeholder, to acquire the remaining shares. This acquisition is part of NCBA Group’s strategy to broaden its bancassurance operations, transforming it into a universal bank that caters to all the financial needs of its customers. The acquisition is contingent upon the necessary due diligence, approval from the boards of NCBA, AIG Kenya, AIG Group, and the relevant banking, insurance, and other regulatory authorities.

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

Cytonn Report: Banking Sector Deals and Acquisitions
Acquirer	Bank Acquired	Book Value at Acquisition (Kshs bn)	Transaction Stake	Transaction Value (Kshs bn)	P/Bv Multiple	Date
Equity Group	Cogebanque PLC ltd	5.7	91.1%	6.7	1.3x	Jun-23
Shorecap III	Credit Bank Plc	3	20.0%	Undisclosed	N/A	Jun-23
Premier Bank Limited	First Community Bank	2.8	62.5%	Undisclosed	N/A	Mar-23
KCB Group PLC	Trust Merchant Bank (TMB)	12.4	85.0%	15.7	1.5x	Dec-22
Equity Group	Spire Bank	Unknown	Undisclosed	Undisclosed	N/A	Sep-22*
Access Bank PLC (Nigeria)*	Sidian Bank	4.9	83.4%	4.3	1.1x	June-22*
KCB Group	Banque Populaire du Rwanda	5.3	100.0%	5.6	1.1x	Aug-21
I&M Holdings PLC	Orient Bank Limited Uganda	3.3	90.0 0%	3.6	1.1x	Apr-21
KCB Group**	ABC Tanzania	Unknown	100.0%	0.8	0.4x	Nov-20*
Co-operative Bank	Jamii Bora Bank	3.4	90.0%	1	0.3x	Aug-20
Commercial International Bank	Mayfair Bank Limited	1	51.0%	Undisclosed	N/A	May-20*
Access Bank PLC (Nigeria)	Transnational Bank PLC.	1.9	100.0%	1.4	0.7x	Feb-20*
Equity Group **	Banque Commerciale Du Congo	8.9	66.5%	10.3	1.2x	Nov-19*
KCB Group	National Bank of Kenya	7	100.0%	6.6	0.9x	Sep-19
CBA Group	NIC Group	33.5	53%:5%	23	0.7x	Sep-19
Oiko Credit	Credit Bank	3	22.8%	1	1.5x	Aug-19
CBA Group**	Jamii Bora Bank	3.4	100.0%	1.4	0.4x	Jan-19
AfricInvest Azure	Prime Bank	21.2	24.2%	5.1	1.0x	Jan-18
KCB Group	Imperial Bank	Unknown	Undisclosed	Undisclosed	N/A	Dec-18
SBM Bank Kenya	Chase Bank Ltd	Unknown	75.0%	Undisclosed	N/A	Aug-18
DTBK	Habib Bank Kenya	2.4	100.0%	1.8	0.8x	Mar-17
SBM Holdings	Fidelity Commercial Bank	1.8	100.0%	2.8	1.6x	Nov-16
M Bank	Oriental Commercial Bank	1.8	51.0%	1.3	1.4x	Jun-16
I&M Holdings	Giro Commercial Bank	3	100.0%	5	1.7x	Jun-16
Mwalimu SACCO	Equatorial Commercial Bank	1.2	75.0%	2.6	2.3x	Mar-15
Centum	K-Rep Bank	2.1	66.0%	2.5	1.8x	Jul-14
GT Bank	Fina Bank Group	3.9	70.0%	8.6	3.2x	Nov-13
Average			75.0%		1.3x
Average: 2013 to 2018			73.5%		1.7x
Average: 2019 to 2023			75.8%		0.9x
* Announcement Date ** Deals that were dropped

So far in 2023, the average acquisition valuations for banks have remained unchanged at 1.3x, similar to what was recorded in 2022. As such, the valuations still remain low compared to historical prices paid, as highlighted in the chart below;

As at the end of Q3’2023, the number of commercial banks in Kenya stood at 38, same as in Q3’2022 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 with the number of banks remaining 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.

Source: World Bank, Central Bank of Kenya, South Africa Reserve Bank, Central Bank of Nigeria; * Data as of September 2023

Asset Quality: Asset quality for listed banks improved in Q3’2023, with the weighted average Gross Non-Performing Loan ratio (NPL) decreasing by 0.8% points to 13.1%, from 13.9% recorded in Q3’2022. However, the performance remained 3.0% points above the ten-year average of 10.1%. The deterioration in asset quality in Q3’2023 was mainly driven by the 4.1% points increase in Equity Group’s NPL ratio to 13.6%, from 9.5% in Q3’2022. The chart below highlights the asset quality trend for the listed banks:

The deterioration in Equity Group asset quality was mainly attributable to 83.5% an increase in Gross non-performing loans to Kshs 124.5 bn in Q3’2023 from Kshs 67.9 bn in Q3’2022, which outpaced the 27.3% increase in gross loans to Kshs 912.4 bn from Kshs 716.6 bn recorded in Q3’2022. However, the deterioration in listed banks asset quality was mitigated by an improvement in KCB Group’s Asset quality, with Gross NPL ratio decreasing to 16.1% in Q3’2023 from 17.8% in Q3’2022, attributable to a 39.0% increase in Gross loans to Kshs 1,164.0 bn, from Kshs 837.7 bn in Q3’2022, which outpaced the 25.3% increase in gross non-performing loans to Kshs 187.0 bn, from Kshs 149.3 bn recorded in Q3’2022. A total of five out of the ten listed Kenyan banks recorded improvement in their asset quality, despite the deteriorated in the general business environment which was evidenced by the average Purchasing Managers Index (PMI) of 48.0 in Q3’2023 which was below the 50.0 points no change threshold, despite the slight improvement from an average of 47.4 in Q3’2022. Going forward, we expect credit risk to remain elevated in the short to medium term mainly on the back of a tough operating environment occasioned by elevated inflationary pressures as well as sustained depreciation of the Kenya shilling.

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

Cytonn Report: Listed Banks Asset Quality
	Q3'2023 NPL Ratio*	Q3'2022 NPL Ratio**	% point change in NPL Ratio	Q3'2023 NPL Coverage*	Q3'2022 NPL Coverage**	% point change in NPL Coverage
Equity Group	13.6%	9.5%	4.1%	53.4%	63.0%	(9.6%)
NCBA Group	12.0%	12.6%	(0.6%)	56.8%	65.3%	(8.5%)
KCB Group	16.1%	17.8%	(1.8%)	62.1%	52.8%	9.3%
Standard Chartered Bank Kenya	14.4%	15.4%	(1.0%)	84.8%	83.9%	0.9%
ABSA Bank Kenya	9.8%	6.6%	3.2%	67.4%	80.0%	(12.5%)
Co-operative Bank of Kenya	14.9%	14.0%	0.9%	62.1%	69.3%	(7.2%)
Stanbic Bank	9.0%	10.1%	(1.1%)	66.3%	63.4%	3.0%
I&M Holdings	11.8%	9.5%	2.3%	51.8%	75.4%	(23.6%)
Diamond Trust Bank	12.6%	12.7%	(0.1%)	48.7%	45.2%	3.4%
HF Group	22.8%	20.3%	2.5%	74.0%	77.2%	(3.2%)
Mkt Weighted Average	13.1%	12.2%	0.9%	62.0%	67.8%	(5.8%)
*Market cap weighted as at 22/12/2023
**Market cap weighted as at 02/12/2022

Key take-outs from the table include;

Asset quality for the listed banks deteriorated in Q3’2023, with market weighted average NPL increasing by 0.9% points to 13.1% from a 12.2% in Q3’2022. The worsening of asset quality was mainly driven by a deterioration in Equity Group, ABSA Bank Kenya, HF Group, I&M Holdings and Coop Bank’s asset quality with their NPL ratio increasing by 4.1%, 3.2%, 2.5%, 2.3% and 0.9% respectively,
Equity Group had the highest NPL ratio jump by 4.1% points to 13.6% from 9.5% points in Q3’2022, attributable to 83.5% increase in Gross non-performing loans to Kshs 124.5 bn in Q3’2023 from Kshs 67.9 bn in Q3’2022, which outpaced the 27.3% increase in gross loans to Kshs 912.4 bn from Kshs 716.6 bn recorded in Q3’2022, and,
Market weighted average NPL Coverage for the listed banks decreased by 5.8% points to 62.0% in Q3’2023, from 67.8% recorded in Q3’2022, majorly on the back of decreased NPL coverage recorded by I&M Holdings, ABSA Bank, Equity Group, NCBA Group, Co-operative Bank and HF Group of Kenya by 23.6%, 12.5%, 9.6%, 8.5%, 7.2% and 3.2% respectively in Q3’2023. However, the NPL coverage ratios of KCB Group, Diamond Trust Bank and Stanbic bank increased by 9.3% points, 3.4% points and 3.0% points to 62.1%, 48.7% and 66.3% respectively in Q3’2023.

Section II: Summary of the Performance of the Listed Banking Sector in Q3’2023:

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

Cytonn Report: Listed Banks Performance in Q3’2023
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
Equity Group	5.3%	32.0%	58.4%	21.3%	5.6%	36.9%	44.3%	36.6%	19.9%	4.1%	70.0%	25.5%	21.8%
NCBA Group	14.4%	21.1%	35.3%	11.7%	6.0%	(8.0%)	44.4%	11.9%	18.6%	(2.9%)	56.3%	16.0%	18.4%
KCB Group	0.4%	36.4%	77.9%	21.6%	6.8%	38.7%	36.1%	65.7%	79.6%	37.5%	63.3%	38.1%	20.2%
SCBK	11.8%	28.5%	(10.0%)	34.5%	8.5%	(6.6%)	27.9%	19.0%	4.5%	(50.3%)	48.0%	5.5%	22.7%
Absa Bank	14.9%	33.5%	62.2%	26.0%	8.8%	6.4%	27.0%	21.2%	26.1%	(15.7%)	93.4%	14.3%	25.8%
Coop Bank	7.6%	12.9%	41.3%	2.5%	8.4%	2.1%	38.5%	7.8%	0.2%	1.5%	87.3%	12.8%	22.3%
Stanbic Holdings	32.7%	48.2%	63.2%	42.4%	7.8%	23.0%	41.0%	22.7%	14.3%	(41.3%)	82.1%	5.9%	21.4%
I&M Holdings	14.3%	27.5%	41.5%	18.4%	6.2%	21.2%	35.9%	16.9%	30.6%	14.6%	71.4%	24.3%	15.9%
DTBK	5.2%	33.0%	51.5%	19.6%	5.4%	33.9%	31.4%	25.2%	27.3%	(4.5%)	63.2%	18.7%	10.0%
HF Group	283.9%	20.3%	19.1%	21.4%	5.4%	20.6%	32.2%	38.5%	12.9%	10.9%	87.8%	9.3%	5.3%
Q3'23 Mkt Weighted Average*	11.2%	29.7%	47.9%	21.3%	7.0%	17.0%	37.7%	27.7%	24.4%	(4.3%)	70.6%	19.1%	21.1%
Q3'22 Mkt Weighted Average*	36.3%	16.4%	19.7%	17.6%	7.3%	30.1%	38.1%	16.3%	9.8%	6.5%	73.7%	17.1%	24.2%
*Market cap weighted as at 22/12/2023
**Market cap weighted as at 02/12/2022

Key takeaways from the table include:

The listed banks recorded an 11.2% growth in core Earnings per Share (EPS) in Q3’2023, compared to the weighted average growth of 36.4% in Q3’2022, an indication of sustained performance despite the tough operating environment experienced in 2023 on the back of elevated inflationary pressures. The performance during the period was mainly supported by a 21.3% weighted average growth in net interest income, coupled with a 17.0% weighted average growth in non-funded income,
Investments in government securities by listed banks reduced significantly in Q3’2023, having recorded a market weighted average decline of 4.3%, a reversal from the 6.5% growth recorded in Q3’2022. The declining investment in Kenya government securities is partly attributable to the increased perceived risk of default by the government, mainly on the back of high debt sustainability concerns given the current high public debt stock as well as the impending Eurobond maturity in June 2024,
The listed banks’ Net loans and advances to customers recorded a weighted average growth of 19.1% in Q3’2023, an increment from the 17.1% growth recorded in Q3’2022, an indication of increased lending despite the elevated credit risk following the continued implementation of risk-based lending by the banks,
Interest income recorded a weighted average growth of 29.7% in Q3’2023, compared to 16.4% in Q3’2022. Similarly, interest expenses recorded a market weighted average growth of 47.9% in Q3’2023 compared to a growth of 19.7% in Q3’2022. Consequently, net interest income recorded a weighted average growth of 21.3% in Q3’2022, an increment from the 17.6% growth recorded over a similar period in 2022, and,
The listed banks recorded a 21.1% weighted average growth on return on average equity (RoaE), 3.1% points lower than the 24.2% growth registered in Q3’2022. Additionally, the entire banking sector’s Return On Equity (ROE) stood at 4%, a 1.8% points decrease from the 27.2% recorded in Q3’2022. 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: Online research, * Figure as of H1’2023

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

The banking sector continue 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 11.2%, as banks continued to implement their revenue diversification strategies. Notably, 8 out of the 10 listed banks recorded a significant growth in their Non-funded income in Q3’2023. However, we believe that the uncertainty surrounding the June 2024 Eurobond Maturity coupled with the deteriorated business environment, will see banks continue increasing their provisioning to cushion themselves from the elevated credit risk. Based on the current operating environment, we believe the future performance of the banking sector will be shaped by the following key factors:

Growth in Interest income: Going forward, we expect interest income growth to remain a key driver in the banking industry, evidenced by the 29.7% growth recorded in Q3’2023, higher than the 16.4% growth recorded in Q3’2022. Additionally, the government securities continue to witness increases in yields, as such we believe the continued allocation to government securities will lead to an increase in overall interest income. 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,
Revenue Diversification: In Q3’2023, non-funded income (NFI) recorded a 17.0% weighted average growth, slower than the 30.1% weighted growth in Q3’2022 with 8 out of the 10 listed Banks recording an increase in their non-funded income. Despite the slower growth in NFI, the weighted average contribution of NFI to total operating income came in at 37.7% in Q3’2023, 0.4% points lower than the 38.1% weighted average growth contribution recorded in Q3’2022. As such, there exists an opportunity for the sector to further increase NFI contributions to revenue given the continuous adoption of digitization, and,
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, 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 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:

Cytonn Report: Listed Banks Earnings, Growth and Operating Metrics
Bank	Loan to Deposit Ratio	Cost to Income (With LLP)	Return on Average Capital Employed	Deposits/ Branch (bn)	Gross NPL Ratio	NPL Coverage	Tangible Common Ratio	Non-Funded Income/Revenue
Absa Bank	93.4%	55.6%	25.8%	4.3	9.8%	67.4%	12.8%	27.0%
NCBA Group	56.3%	60.2%	18.4%	5.2	12.0%	56.8%	12.1%	44.4%
Equity Bank	70.0%	64.8%	21.8%	3.4	13.6%	53.4%	10.1%	44.3%
KCB Group	63.3%	65.4%	20.2%	2.8	16.1%	62.1%	9.6%	36.1%
SCBK	48.0%	53.5%	22.7%	9.3	14.4%	83.0%	15.1%	27.9%
Coop Bank	87.3%	54.3%	22.3%	2.5	14.9%	62.1%	15.6%	38.5%
Stanbic Bank	82.1%	57.8%	21.4%	9.3	9.0%	66.3%	13.3%	41.0%
DTBK	63.2%	70.6%	10.0%	3.4	12.6%	48.7%	11.8%	31.4%
I&M Holdings	71.4%	64.3%	15.9%	4.7	11.8%	51.8%	13.4%	35.9%
HF Group	87.8%	90.7%	5.3%	1.9	22.8%	74.0%	14.0%	32.2%
Q3'2023 Weighted Average	70.6%	60.4%	21.1%	4.7	13.1%	61.8%	12.3%	37.7%
Market cap weighted as at 22/12/2023

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 banks operating metrics, meant to assess efficiency, asset quality, diversification, and profitability, among other metrics. The overall Q3’2023 ranking is as shown in the table below:

Cytonn Report: Listed Banks Q3’2023 Rankings
Bank	Franchise Value Rank	Intrinsic Value Rank	Weighted Rank Score	Q3'2022 Rank	Q3'2023 Rank
Absa Bank	2	2	2.0	3	1
Coop Bank	1	4	2.8	3	2
I&M Holdings	5	3	3.8	5	3
KCB Group	8	1	3.8	1	3
Stanbic Bank	4	5	4.6	9	5
Equity Bank	6	6	6.0	2	6
SCBK	3	9	6.6	7	7
NCBA Group	7	8	7.6	6	8
DTBK	10	7	8.2	8	9
HF Group	9	10	9.6	10	10

Major Changes from the Q3’2023 Ranking are:

ABSA Bank rose to position 1 in Q3’2023, up from rank number 3 in Q3’2022, mainly supported by strong franchise and intrinsic value score, attributable to improvement in the bank’s management quality and earning quality, with the return on average equity improving by 2.5% points to 25.8% in Q3’2023, up from 23.2% registered in Q2’2022. Additionally, the cost to income ratio without LLPs declined by 1.0% points to 38.7% in Q3’2023, from 39.7% in Q3'2022. Notably, the bank’s Net Interest Margin increased by 1.3% points to 8.8% in Q3’2023 from 7.6% in Q3’2022,
Stanbic Bank climbed up 4 places to rank position 5 in Q3’2023, up from position 9 in Q3’2022 supported by significant improvement in both franchise and intrinsic value score. Its performance was driven by a 2.3% points growth in return on average equity to 21.4% in Q3’2023 from 19.1% in Q3’2022. Additionally, the cost to income ratio without LLPs declined by 2.2% points to 43.2% in Q3’2023, from 45.4% in Q3'2022. Notably, the bank’s Net Interest Margin increased by 1.6% points to 7.8% in Q3’2023 from 6.2% in Q3’2022, and,
Equity Group slid 4 places to rank at position 6 in Q3’2023, down from position 2 in Q3’2022, mainly due to a deterioration in the group’s asset quality as the gross NPL ratio rose to 13.6%, from the 9.5% recorded in Q3’2022. Additionally, there was a deterioration in operating efficiency, with the cost-to income ratio with LLPs increasing by 8.2% points to 64.8% from 56.6% recorded in Q3’2022, while the cost-to ratio without LLPs also increased by 3.1% to 50.2% from 47.1% in Q3’2022.

For more information, see our Cytonn Q3’2023 Listed Banking Sector Review

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.