Cytonn Investments has today released their FY’2016 Banking Sector Report, which ranks KCB Group as the most attractive bank supported by a strong franchise value and intrinsic value score. The franchise score measures the broad and comprehensive business strength of the company and the intrinsic score measures the investor return potential. National Bank ranked lowest, ranking lowest in both franchise and intrinsic value score.
“The report themed ‘Consolidation & resilience in a challenging operating environment’ analyzed the results of the listed banks in the past year so as to determine which banks are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective,” said Elizabeth Nkukuu, CFA, Cytonn’s Chief Investment Officer.
“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,” added Elizabeth.
Equity Group dropped by 2 spots to Position 3 from Position 1 in our Q3’2016 Banking Sector Report, being weighed down by an expensive valuation based on Price to Tangible Book Valuation at 1.7x, above industry average of 1.0x, and low deposits per branch at Kshs 1.3 bn, below the industry average of Kshs 3.4 bn indicating a lower level of efficiency in utilizing its extensive branch network to mobilize deposits.
Standard Chartered Bank rose 3 positions to Position 5 from Position 8 in our Q3’2016 Banking Sector Report as a result of its franchise value boosted by the bank’s high deposits per branch at Kshs 4.7 bn above the industry average of Kshs 3.4 bn, and a strong tangible common equity ratio of 17.0%, above the industry average of 14.2%.
Kenya’s listed banks recorded a 4.4% core EPS growth, compared to a growth of 2.8% in FY’2015. Most banks recorded negative growth with only Standard Chartered Bank and Diamond Trust Bank recording double digit growth at 43.9% and 16.6%, respectively. The other banks that recorded positive growth are I&M Holdings and Co-operative Bank growing at 8.4% and 8.3%, respectively. Deposits grew at a slightly faster rate than loans during the year, which carried forward the trend witnessed for FY’2015. The loan growth was low as the private sector credit uptake recorded a 17-month decline to 4.0%, 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% from 6.1% in FY’2015.
“Banks were able to protect their net interest margins, even registering an increase to 9.2% from 8.7% in FY’2015. However, the full effects of the Banking Act (Amendment) 2015 that regulates the loan and deposit pricing framework are yet to be felt and 2017 will provide a much better picture on its impact. The increase in non-performing loan (NPL) ratio to 8.4%, from 6.1% in FY’2015, highlights increased risks around asset quality in the sector, with banks having taken a prudent approach based on a stringent risk assessment framework,” said Maurice Oduor, Investment Manager. “All listed banks recorded a positive return on equity to average 19.9% from 17.1% in FY’2015, supported by the favorable macroeconomic environment that prevailed in 2016 as opposed to 2015, which was characterized by a tough operating environment,” added Maurice.
The sector has remained resilient by adopting a prudent banking approach. Consolidation is set to gather pace as key issues such as increased loan loss provisioning and the regulated loan and deposit pricing framework prevail in this challenging operating environment. This will transition the industry into one with fewer, but stable banks, leading to a more efficient and stable banking sector.
The report is available online: (link here)
Table: Cytonn’s FY’2016 Banking Report Rankings
|
CYTONN’S FY'2016 BANKING REPORT
RANKINGS |
|||||
|
Bank |
Franchise
Value Total Score |
Total
Return Score |
Weighted Score |
FY‘2016
Rank |
Q3‘2016
Rank |
|
KCB Group |
60.0 |
1.0 |
24.6 |
1 |
2 |
|
Co-operative Bank |
59.0 |
3.0 |
25.4 |
2 |
3 |
|
Equity Group |
61.0 |
7.0 |
28.6 |
3 |
1 |
|
Diamond Trust Bank |
62.0 |
10.0 |
30.8 |
4 |
5 |
|
Standard Chartered |
69.0 |
6.0 |
31.2 |
5 |
8 |
|
I&M Holdings |
71.0 |
5.0 |
31.4 |
6 |
4 |
|
Barclays |
81.0 |
2.0 |
33.6 |
7 |
6 |
|
Stanbic Holdings |
79.0 |
4.0 |
34.0 |
8 |
7 |
|
NIC Bank |
80.0 |
9.0 |
37.4 |
9 |
9 |
|
HF Group |
114.0 |
8.0 |
50.4 |
10 |
10 |
|
NBK |
121.0 |
11.0 |
55.0 |
11 |
11 |
