Cytonn Investments has ranked KCB Group as the most attractive bank in Kenya, in its Q3 2019 Banking Sector Report.
The multi-investment company says that KCB’s ranking is as a result of a strong franchise value and intrinsic value score.
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”, analysed 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.
The company focuses on the five key drivers of the sector, namely Regulation, Revenue Diversification, SME Focused Lending, Consolidation and Asset Quality in the 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“On the regulatory front, the interest rate cap was repealed following the Presidents refusal to assent the Finance Bill 2019 and the lack of the two-thirds majority quorum needed to debate the issue which resulted in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 David Gitau.
KCB took the top position in the rankings, from a franchise value and a weighted score of both franchise and future growth opportunity perspective having a better capacity to generate profits from its core business.
Diamond Trust Bank Kenya took the top position from a future growth opportunity perspective, however, it had a weak franchise score moving it to position seven on the weighted score. HF came in 10th Position on the back of weak franchise rankings scores as well as a non-promising future growth opportunity perspective as a result of negative losses, poor asset quality and lack of cost efficiency.
The ten listed Kenyan 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 percent in Q3 2018.
The banks recorded stronger deposit growth, which came in at 11.0 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.
Interest income increased by 4.5 percent, lower than the 6.1 percent growth recorded in the sector in Q3 2018. 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 recorded a Net Interest Margin of 7.7 percent, 30 basis points (bps) lower than the 8.0 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 (NFI) grew by 15.8 percent year-on-year, 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.