Following the release of the Q12016 results by banks, we undertook an analysis on the Kenyan Banking sector to point out any material changes from the FY2015 banking report. In our report, we recommend to investors which banks are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective.
The report is themed Transition continues, but to a new and different landscape as the issues facing the banking sector, which is undergoing a transition, still persist. There are some key areas of transition, which will change the banking landscape in Kenya going forward:
- Continued Sector Realignment In Q12016 we still are of the view that the industry is divided into the haves and have-nots which still poses a risk to the sector. During the month, Barclays bank expressed their wish to exit their African business selling 12.2% to a consortium while Giro Bank, Oriental Commercial Bank and Equatorial Commercial Bank have been acquired. Key to note is that banks with clear strategy and well defined market niche will survive while those with unclear strategies will either have to adapt or die,
- Flight to Quality - With the jitters in the banking system previously witnessed, especially after the placement in receivership of 3 banks, there is a large flight to quality happening in the Kenyan market, with large volumes of deposits and business moving from smaller banks to larger, and perceived less risky Tier I banks. As this continues, small banks will be forced to consolidate or be bought out, as they face liquidity pressures and low business volumes; this all will end up in a fewer number of banks, but stronger and more robust banks,
- Firmer Regulator There is now a much firmer, and much more trusted, regulator in place at CBK. Going forward, increased emphasis is going to be placed on corporate governance, professional ethics, as well as deep levels of supervision on asset quality and levels of provisioning. This increased levels of supervision, and low levels of tolerance, for banks that do not adhere to the highest standards of governance and ethics, and safe banking practices, will lead to their closure, and,
- Capital Requirement and Regulation As per the budget statement for the fiscal year 2016/17 the Government wishes to re-introduce the Kshs. 5.0 bn capital requirement for banks. With growing public exposure towards financial institutions, it is imperative that banks are well capitalized. Higher capital levels will create a more stable banking system, and will force consolidation, and banks such as KCB Group & Family Bank already raising capital in the markets. Banks looking to raise capital will have to do so at attractive valuations for investors, and for those banks unable to raise capital from the markets, they will be forced to merge or be acquired.
All in all, there are a number of areas of transition ahead for Kenyan banks. What is important is that, after we pass through this phase of transition, the landscape will look different; we shall have fewer banks, as can be seen from the table below, Kenya is overbanked, but much stronger, more robust, transparent and well-governed banks, which is good for the economy.
Below are the operating metrics for listed banks in Kenya:
| Q1'2016 Listed Banking Sector Metrics | ||||||||
| Bank | Core EPS Growth * | Deposit Growth | Loan Growth | Net Interest Margin | NPL Ratio | Cost to Income ** | ROaE | ROaA |
| HF Group | 47.6% | 23.6% | 12.1% | 6.6% | 8.5% | 51.2% | 10.2% | 1.7% |
| Stanchart | 42.7% | 12.9% | (3.7%) | 9.4% | 13.4% | 39.0% | 16.4% | 3.1% |
| Equity Group | 19.8% | 8.1% | 22.4% | 11.0% | 4.0% | 48.9% | 27.9% | 4.9% |
| I&M Bank | 10.3% | 15.7% | 11.3% | 7.8% | 4.9% | 30.3% | 33.5% | 4.8% |
| DTB Bank | 9.5% | 26.1% | 24.1% | 7.4% | 4.0% | 41.7% | 16.0% | 2.5% |
| Co-op Bank | 7.7% | 11.9% | 16.1% | 16.9% | 4.0% | 45.0% | 16.5% | 2.7% |
| KCB Group | 6.1% | 6.6% | 16.5% | 8.5% | 8.8% | 48.4% | 21.0% | 3.2% |
| CFC Bank | 3.0% | 3.2% | 14.7% | 5.9% | 5.1% | 48.8% | 19.5% | 2.8% |
| Barclays Bank | 2.6% | 8.3% | 21.7% | 10.4% | 5.2% | 51.9% | 20.5% | 3.7% |
| NIC Bank | (0.3%) | 14.8% | 6.1% | 8.1% | 12.0% | 33.7% | 17.5% | 3.1% |
| National Bank | (38.4%) | 16.6% | (5.3%) | 6.8% | 25.6% | 60.9% | (27.2%) | (1.6%) |
| Q1'2016 Weighted Average | 13.6% | 11.0% | 15.8% | 9.0% | 8.7% | 45.2% | 21.4% | 3.6% |
| Q1'2015 Weighted Average | 8.9% | 16.5% | 21.3% | 8.1% | 4.9% | 49.5% | 20.8% | 3.0% |
| *Average is Market cap weighted | ||||||||
| **Without Loan Loss Charge | ||||||||
With GDP growth prospects for 2016 at 5.8%, Kenyas listed banks recorded improved EPS growth in Q12016 of 13.6% compared to the Q12015 growth of 8.9%. This was on the back of an improved macroeconomic environment, which saw interest rates decline to below historical average levels as evidenced by the interbank and the 91 day T-bill rates declining to 2.3% and 7.1%, respectively. With the banking sector contributing 10.1% to GDP, a strong growth exhibited by the sector is beneficial to drive the economy as the private sector is not crowded out, as banks can afford to take up some risk and loan out more to the sector. The growth witnessed in the sector is as a result of the sectors ability to develop products that respond to the needs of Kenyans, such as (i) convenience and efficiency through alternative banking channels such as mobile and agency banking, (ii) increased financial inclusion and banking the informal market, and (iii) a demographic boost in Kenya, such as a growing middle class, which has led to increased demand for intermediary services such as banking.
There are three takeaways from the table above:
- The sector recorded a 13.6% core EPS growth, with HF Group, Standard Chartered, Equity Group and I&M Bank recording double-digit growths. Only NIC Bank and National Bank recorded core EPS declines,
- Banks still registered high growth non-performing loans, with the NPL ratio at 8.7% in Q12016 compared to 4.9% in Q12015, and,
- NBK was the only bank that reported negative return on equity.
| Kenyan Banks by Size | |||
| Tier | Local Banks | Banks with significant foreign ownership | Banks with Gov. Participation |
| Tier I (>5% Market Share) (a) | · Commercial Bank of Africa | · Barclays Bank | · KCB Group |
| · Equity Group Holdings | · Standard Chartered | ||
| · Co-operative Bank |
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| Tier II (>1% and <5% Market Share) (a) | · Diamond Trust Bank | · Bank of Africa | · HF Group |
| · Chase Bank | · Bank of Baroda | · National Bank | |
| · Family Bank | · Bank of India |
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| · Imperial Bank* | · CfC Stanbic |
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| · I&M Holdings | · Citibank N.A |
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| · NIC | · Eco bank |
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| · Prime Bank | · Guaranty Trust |
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| Tier III** (<1% Market Share) (a) | · ABC Bank | · First Community | · Consolidated Bank |
| · Credit Bank | · Habib A.G. Zurich | · Development Bank | |
| · Equatorial Bank | · Habib Bank |
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| · Fidelity Bank | · Gulf African |
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| · Giro Bank | · United Bank for Africa |
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| · Guardian bank |
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| · Jamii Bora Bank |
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| · Middle East Bank |
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| · Oriental Commercial |
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| · Paramount |
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| · Trans-National |
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| · Victoria |
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| · Sidian |
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| * - Under receivership | |||
| ** -Given that Kenya is overbanked, and the sector is in transition, these are the banks ripe for consolidation or being bought out by larger banks | |||
| (a) Market share by net assets, total deposits, total equity, deposit accounts and local accounts | |||
As per our analysis on the banking sector, from a franchise value and from a future growth opportunity perspective, below is the comprehensive ranking of the listed banks. Major changes include:
- Co-operative bank moving up the ranks to position three from position 5 as per the FY2015 Banking Sector report,
- DTBK dropping to position six from position 3 in FY2015 as per the FY2015 Banking Sector report,
- CfC Stanbic dropping to position 9 from position 6 as per the FY2015 Banking Sector Report,
For a comprehensive analysis on the ranking and methodology behind it, see our Cytonn Q12016 Banking Sector Report
| CYTONNS Q1'2016 BANKING REPORT RANKINGS | ||
| Banks | Q1'2016 rank | FY2015 rank |
| KCB Group | 1 | 1 |
| Equity Group | 2 | 2 |
| Co-operative bank | 3 | 5 |
| Barclays | 4 | 7 |
| I&M | 5 | 4 |
| DTBK | 6 | 3 |
| Standard Chartered | 7 | 9 |
| NIC | 8 | 8 |
| CfC Stanbic | 9 | 6 |
| HF Group | 10 | 10 |
| National Bank | 11 | 11 |
After the above highlighted transition areas are achieved, we are likely to have a more efficient, stable and well capitalized banking sector with strict adherence to prudential guidelines and hence safe and sound banking practices. This will spur increased confidence, which is a key pillar in any financial services sector.
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Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes
