NAIROBI, KENYA, JUNE 17th 2019
Cytonn Investments has today released its Q1’2019 Banking Sector Review, which highlighted the performance of the listed banks in Kenya following the release of the Q1’2019 financial results. As per the report, banks had an improved performance on aggregate, as they recorded improved profitability, in a relatively tough operating environment, thus highlighting the resilience of the sector.
The report, themed ‘Consolidation and Diversification to drive Growth’, analyzed the Q1’2019 results of the listed banks “We note that the increased emphasis on operating efficiency by banks seems to be bearing fruit, with the listed banking sector’s operating efficiency improving y/y, which was further supported by a recovery in interest revenue, largely supported by the asset re-allocation to government securities, and increased lending to specific segments”, said Caleb Mugendi, Investment Associate at Cytonn Investments. “The continued focus on alternative banking channels continues to boost banks’ Non-Funded Income (NFI), as well as reduce the staff and branch expenses. There are four key drivers in the sector namely; are regulation, diversification, consolidation and asset quality in this report. With a tighter operating environment, diversification of revenue, cost management and asset quality management will prove to be the key growth drivers for players in the banking sector”, added Caleb.
“With the deteriorating asset quality, evidenced by the rising non-performing loans, we expect banks to continue employing prudent loan disbursement policies, and consequently tighten their credit standards, in order to address these concerns around asset quality. “The tough operating environment has made it hard for the smaller banks that do not serve a niche. Therefore, as has been the case recently, we are likely to see more consolidation activity, as larger banks acquire the smaller players in the sector, who are constrained in capital, as they seek to grow their market share, penetrate new market segments and expand their product offerings. We expect to see mergers and strategic partnerships between banks, aimed at creating larger entities with sufficient capital base to pursue growth as well as increase their respective competitive edge and pricing power. The residual effect will be a stable sector with well capitalized players able to catalyze economic growth as well as withstand any systemic shocks,” said Ian Kagiri, Investment Analyst at Cytonn Investments.
Table 1: Cytonn’s Q1’2019 Listed Banks Earning and Growth Metrics
|
Bank |
Core EPS Growth |
Interest Income Growth |
Interest Expense Growth |
Net Interest Income Growth |
Net Interest Margin |
Non-funded income Growth |
NFI to Total Operating Income |
Growth in Total Fee and Commissions |
Deposit Growth |
Growth in Govt Securities |
Cost to Income |
Loan to Deposit ratio |
Loan Growth |
Cost of Funds |
Return on average equity |
|
Stanbic Bank |
N/A |
12.9% |
2.2% |
19.3% |
4.9% |
17.7% |
49.0% |
61.5% |
29.0% |
(8.8%) |
53.0% |
75.9% |
12.6% |
3.2% |
14.3% |
|
NBK |
N/A |
18.7% |
(17.8%) |
41.7% |
8.2% |
(9.2%) |
22.5% |
(10.8%) |
2.6% |
15.1% |
92.9% |
51.5% |
(10.2%) |
3.3% |
11.3% |
|
SCBK |
31.2% |
(6.4%) |
(28.8%) |
2.8% |
7.8% |
5.6% |
32.4% |
(10.0%) |
0.3% |
13.9% |
51.9% |
50.5% |
3.3% |
3.4% |
18.2% |
|
I&M |
30.5% |
8.9% |
18.2% |
2.1% |
6.1% |
9.7% |
38.2% |
(4.0%) |
28.8% |
8.2% |
44.9% |
76.4% |
10.6% |
5.0% |
17.9% |
|
Barclays |
13.8% |
7.1% |
38.8% |
(1.3%) |
8.7% |
14.0% |
32.2% |
11.6% |
15.9% |
24.0% |
61.9% |
80.6% |
9.0% |
3.6% |
16.5% |
|
KCB |
11.4% |
7.1% |
(4.1%) |
11.2% |
8.5% |
9.2% |
32.3% |
11.6% |
11.2% |
18.9% |
54.7% |
84.1% |
10.9% |
3.1% |
22.4% |
|
DTBK |
9.3% |
(5.1%) |
(3.0%) |
(6.6%) |
6.2% |
15.3% |
25.3% |
(7.4%) |
1.3% |
5.3% |
51.8% |
68.5% |
(2.9%) |
5.0% |
13.8% |
|
Equity |
4.9% |
6.5% |
7.4% |
6.3% |
8.6% |
6.9% |
40.8% |
3.2% |
12.1% |
13.0% |
49.8% |
71.3% |
12.7% |
2.6% |
22.8% |
|
Co-op |
4.4% |
(2.9%) |
6.2% |
(6.5%) |
8.7% |
19.1% |
37.7% |
33.6% |
7.4% |
33.1% |
54.2% |
79.2% |
(0.5%) |
3.7% |
18.3% |
|
NIC |
(4.3%) |
1.3% |
(7.9%) |
9.4% |
5.9% |
7.2% |
29.1% |
6.2% |
5.0% |
10.3% |
65.2% |
78.3% |
2.1% |
5.1% |
12.2% |
|
HF |
N/A |
(16.2%) |
(8.3%) |
(26.7%) |
4.1% |
(8.8%) |
33.6% |
79.7% |
(5.3%) |
45.1% |
120.5% |
89.1%** |
(13.9%) |
7.4% |
(7.4%) |
|
Q1'2019Weighted Average* |
12.2% |
3.6% |
2.5% |
4.5% |
8.0% |
10.7% |
36.0% |
11.2% |
11.0% |
16.1% |
53.8% |
74.0% |
7.7% |
3.4% |
19.2% |
|
Q1'2018 Mkt cap Weighted Average |
14.4% |
9.3% |
11.4% |
8.1% |
8.1% |
9.5% |
37.1% |
12.2% |
9.4% |
25.0% |
56.6% |
76.8% |
6.1% |
3.6% |
18.4% |
*Market cap weighted as at 31st May 2019
** Loans to Loanable funds used owing to nature of the business
Key takeaways from the table above include:
- Kenya Listed Banks recorded a 12.2% average increase in core Earnings Per Share (EPS), compared to a growth of 14.4% in Q1’2018, with the relatively lower performance attributed to the base effect, as the sector was coming from a relatively poor performance in Q1’2017, which was an 8.6% decline,
- Deposit growth came in at 11.0%, faster than the 9.4% growth recorded in Q1’2018. Despite the relatively fast deposit growth, interest expenses rose by 2.5% compared to 11.4% in Q1’2018 indicating that banks have been mobilizing relatively cheaper deposits. Furthermore, in September 2018, an implementation of the Finance Act 2018 saw the removal of the minimum interest rate payable on deposits, which stood at 70.0% of the Central Bank Rate (CBR). This helped mitigate high increments in interest expense, despite the relatively fast deposit growth,
- Average loan growth came in at 7.7%, which was faster than the 6.1% recorded in Q1’2018, indicating that there was an improvement in credit extension, with banks targeting select segments such as corporate entities, and Small and Medium Enterprises (SMEs). Government securities on the other hand recorded a growth of 16.1% y/y, which was faster compared to the loans, albeit slower than 25.0% recorded
in Q1’2018. This highlights banks’ continued preference towards investing in government securities, which offer better risk-adjusted returns. Interest income increased by 3.6%, compared to a growth of 9.3% recorded in Q1’2018. The slower growth in interest income despite the increased allocations to both loans and government securities may be attributable to the decline in yields on loans owing to the 100-bps decline in the CBR, and the decline in yields on government securities, and consequently, the Net Interest Margin (NIM) declined to 8.0% from 8.1% in Q1’2018,
- Non-Funded Income grew by 10.7% y/y, faster than 9.5% recorded in Q1’2018. The growth in NFI was supported by the 11.2% average increase in total fee and commission income, albeit slower than the 12.2% growth recorded in Q1’2018. The fee and commission income growth continues to be subdued by the implementation of the Effective Interest Rate (EIR) model under IFRS 9 in 2018, which requires banks to amortize the fees and commissions on loans, over the tenor of the loan. The relatively slower loan growth, a majority of which is to corporates, also inhibited the growth in fee and commission income loans, as corporates tend to be charged relatively lower commission rates, and,
- The sector continued to record an improvement in operating efficiency, as shown by the improvement in the Cost to Income Ratio (CIR) to
53.8%, from 56.6% in Q1’2019, indicating that the raft of cost rationalization measures adopted by banks in the onset of the capped interest rate regime, have borne fruit. Without LLP, the CIR also improved y/y, declining to 48.0%, from 49.0% in Q1’2018.
The table below ranks banks based on their Return on Average Equity (RoAE):
|
Bank |
Return on average equity |
|
|
|
|
Equity |
22.8% |
|
KCB |
22.4% |
|
Co-op |
18.3% |
|
SCBK |
18.2% |
|
I&M |
17.9% |
|
Barclays |
16.5% |
|
Stanbic Bank |
14.3% |
|
DTBK |
13.8% |
|
NIC |
12.2% |
|
NBK |
11.3% |
|
HF |
(7.4%) |
|
Q1'2019 Mkt cap Weighted Average* |
19.2% |
|
Q1'2018 Mkt cap Weighted Average |
18.4% |
|
|
|
*Market cap weighted as at 31st May 2019
Source: Cytonn Research
