NAIROBI, Kenya, Dec 9 – Cytonn Investments has released its Q3’2019 Banking Sector Report, which ranks KCB Group as the most attractive listed bank in Kenya, supported by a strong franchise value and intrinsic value score.
The bank is followed by I&M Bank, Co-operative bank and Equity Bank respectively. The report sampled 10 banks in the country.
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.
The report, themed “Higher Net Interest Margins and Consolidation to Drive Growth in the Post Rate Cap Era”, analyzed the Q3’2019 results of the listed banks.
“We note that the increased emphasis on revenue diversification by banks seems to be bearing fruit, with the listed banking sector’s average Non-Funded Income (NFI) improving year on year as seen in the Q3’2019 figures, where the average NFI growth was 15.8 percent, higher than the 5.9 percent growth witnessed in Q3’2018. Increased revenue diversification is expected to continue going forward leveraging on digital innovations”, said David Gitau, Investment Analyst at Cytonn Investments.
There are five key drivers in the sector, namely Regulation, Revenue Diversification, SME Focused Lending, Consolidation and Asset Quality in this report.
“On the regulatory front, the interest rate cap was repealed following the Presidents refusal to assent the Finance Bill 2019 and the lack of the two-thirds majority quorum needed to debate the issue which resulted in the failure to overturn the recommendations by President Uhuru thus allowing the repeal of the interest rate cap during the last parliamentary sitting on November 5th, 2019. We expect more forays by banks into the SME focused lending, as players refocus on the core operations to take advantage of the removal of interest rate cap”, added Gitau.
During the period, the ten listed banks recorded an 8.7 percent average increase in core Earnings per Share (EPS), compared to an increase of 16.2 percent in Q3’2018 for all listed banks. Return on Average Equity (ROaE) increased to 19.3 percent, from 18.8 period in Q3’2018,
The report also found that the banks recorded stronger deposit growth, which came in at 11 percent, faster than the 7.4 percent growth recorded in the sector in Q3’2018. Interest expenses increased at a slower pace of 4.3 percent, compared to 12.5 percent in Q3’2018, indicating the banks have been able to mobilize relatively cheaper deposits.
Average loan growth came in at 11.6 percent, which was faster than the 4.2 percent recorded in the sector in Q3’2018, indicating that there was an improvement in credit extension by the banks.
Government securities recorded a growth of 3.3 percent year on year, which was slower compared to loans, and a decline from the 17.8 percent recorded in the sector in Q3’2018.
“This highlights that banks are beginning to adjust their business models back to private sector lending as opposed to investing in government securities, as the yields on government securities declined during the quarter. Interest income increased by 4.5 percent, lower than the 6.1 percent growth recorded in the sector in Q3’2018,” says the report.
Consequently, the Net Interest Income (NII) grew by 4.9 percent compared to a growth of 3.8 percent in the sector in Q3’2018.
The banks were also noted to have recorded a Net Interest Margin of 7.7 percent, 30 bps lower than the 8 percent recorded in the sector in Q3’2018. The decline was mainly due to a decline in yields recorded in interest earnings assets, following the decline in government securities yields, coupled with the decline in yields on loans due to the 50-bps decline in the Central Bank Rate since the end of Q3’2018.
Non-Funded Income grew by 15.8 percent, faster than the 5.9 percent recorded in the sector in Q3’2018. The growth in NFI was boosted by the total fee and commission income which improved by 22.6 percent, compared to the 0.6 percent growth recorded in the sector Q3’2018, owing to the faster loan growth.