A new report released by Cytonn Investments lists KCB Group as the most attractive listed bank and stable for investment from a franchise value and future growth opportunity perspective.
The report released today at a Nairobi hotel under the theme ‘Consolidation & resilience in a challenging operating environment’ measured the business strength of banks and the potential of return on investment.
The franchise score measures the broad and comprehensive business strength of the company and the intrinsic score measures the investor return potential.
“What was clear from our analysis are two core trends. First, consolidation is happening and will continue to happen – the last two years alone we have had 5 bank transactions. Equatorial Bank, Giro Bank, Oriental Bank, Fidelity Bank and Habib Bank have all been acquired and the common theme is that they are all Tier III banks. As the operating environment becomes tougher and more disciplined, we expect to see more Tier III banks get acquired. Second, even though the operating environment was tough in 2016, the banking sector remained safe and sound; sector core earnings for 2016 grew at 4.4%, better than the 2.8% for 2015, and net interest margins also increased to 9.2% in 2016 from 8.7% in 2015. Apart from consolidation, increased regulation and need for an improvement in asset quality, we believe that the industry will become more stable where only the banks with a strong competitive advantage, either in capitalisation, deposit gathering or niche shall remain, with the remaining banks forced to either merge or be acquired. The sector is shaping up to prudence in operations, while key issues such as increased loan loss provisioning and the regulated loan and deposit pricing framework will lead to a more resilient sector in a challenging operating environment,” said Cytonn’s Chief Investment Officer Elizabeth Nkukuu.
In this report, Equity Group dropped by two spots to position three from Position one in quarter three’s 2016 Banking Sector Report, being weighed down by an expensive valuation based on Price to Tangible Book Valuation at 1.7 times, above industry average of 1.0 times, and low deposits per branch at Kshs 1.3 billion, below the industry average of Kshs 3.4 billion indicating a lower level of efficiency in utilizing its extensive branch network to mobilize deposits.
Standard Chartered Bank rose three positions to position five from Position eight in quarter three’s 2016 Banking Sector Report as a result of its franchise value boosted by the bank’s high deposits per branch at Kshs 4.7 billion above the industry average of Kshs 3.4 billion, and a strong tangible common equity ratio of 17.0 per cent, above the industry average of 14.2 per cent.
Kenya’s listed banks according to the report recorded a 4.4 per cent core EPS growth, compared to a growth of 2.8 per cent in 2015’s financial year.
Generally, most banks recorded negative growth with only Standard Chartered Bank and Diamond Trust Bank recording double digit growth at 43.9 per cent and 16.6 per cent, respectively.
The other banks that recorded positive growth are I&M Holdings and Co-operative Bank growing at 8.4 per cent and 8.3 per cent, respectively.
Deposits grew at a slightly faster rate than loans during the year, which carried forward the trend witnessed the financial year 2015.
The loan growth was low as the private sector credit uptake recorded a 17-month decline to 4.0 per cent, and also banks adopted more prudent credit risk assessment frameworks to ensure healthy loan books; consequently, the non-performing loans ratio rose to 8.4 per cent from 6.1 per cent in the financial year 2015.