The H1’2016 Cytonn Banking Report is out.
After a long anticipation of which banks are the best to invest in from a franchise value and future growth opportunity perspective, the report has ranked Equity Bank Group as the top bank followed by KCB Group which has dropped one position compared to Q’1 2016 Banking Report.
The franchise score measures the broad and comprehensive business strength of the company and the intrinsic score measures the upside potential return.
National Bank was ranked the lowest, ranking lowest in both franchise and intrinsic value score.
“As the banking sector undergoes significant transition, such as increased regulation, realignment through strategic initiatives, and need for innovative banking following the signing into law of The Banking Act (Amendment) Bill 2015, we believe that consolidation is going to happen in the near-term with the weaker banks being the acquisition target,”said Elizabeth Nkukuu, Cytonn’s Chief Investment Officer.
Other listed banks included; Co-operative Bank of Kenya that retained third position, with I&M Bank ranking at position four, up one position from Q’1 2016 rankings.
Barclays Bank fell three positions to position 7, affected by a drop in intrinsic value ranking. This was due to a low expected future growth rate of 2.8% given high competition in the banking sector with its peers being more competitive and innovative in their distribution channels and product offering.
Diamond Trust Bank improved from position 9 to position 5 on the back of a strong loan book growth and coverage policy with the NPL ratio at 4.1% against an industry average of 10.6% with the NPL coverage of 53.9% against an industry average of 35.4%.
NBK has the highest cost to income ratio of 64.6% against the industry average of 47.1%. In addition, National Bank has the largest Non-Performing Loans (NPLs) at 42.1% against the industry average of 10.6%, with one of lowest NPL coverages at 18.1% against the industry average of 35.4%. Being a bank with significant public interest in NBK, with over 70% owned by the Kenyan public, through Treasury and National Social Security Funds shareholding, it is in the public interest that a restructuring be considered to protect and create value for the Kenyan public.
Improved Earnings Per Share
With GDP growth prospects for 2016 at 5.8%, Kenya’s listed banks recorded improved Earning Per Share (EPS) growth of 15.8% in H1”2016 compared to 4.7% in H1’2015 growth of 4.7%. This was on the back of an improved macro-economic 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, providing a conducive environment for credit uptake.
With the banking sector contributing 10.1% of GDP, a strong growth exhibited by the sector is beneficial to drive the economy.
“The growth in Kenya’s banking sector can be attributed to the sector’s ability to develop products that respond to the needs of Kenyans such as convenience and efficiency through alternative banking channels such as mobile and agency banking, increased financial inclusion and rapid growth of Kenya’s middle class leading to increased demand for intermediary services such as banking,” said Maurice Oduor, Investment Manager.
“However, as a result of the interest rate cap, we might witness contraction of the private sector credit growth as banks opt to loan to the government which is considered risk free. Subprime borrowers will likely have to go to non-bank financial institutions,” added Maurice.
As the sector continues to be in transition, key issues such as the introduction of Internal Capital Adequacy Assessment Process (ICAAP) framework, increased discipline and focus on sufficient provisioning, and increased level of “controlled” regulation (Prudential Guidelines and Interest Rate Cap) will transition the industry into consolidation and innovation leading to a more efficient and stable banking sector.