I&M Holdings stock at the Nairobi Securities Exchange (NSE) has been ranked as the most attractive of listed lenders for the three months ended March 2020, Cytonn Investments’ latest banking report covering Q1 2020 shows
Cytonn’s report dubbed Deteriorating Asset Quality amid the COVID-19 Operating Environment, hinges its decision to rank I&M top of the pile on strong franchise value and intrinsic value score.
“We note that asset quality deteriorated in Q1’2020 with the gross NPLs (Non-Performing Loans) ratio increasing by 0.9 percent points to 11.3 percent from 10.4 percent in Q1’2019, this was high compared to the 5-year average of 8.5 percent,” said David Gitau, an investment analyst at Cytonn Investments.
Gitau noted that during the period that banks in accordance with International Finance Reporting Standards 9 were expected to provide both for the incurred and expected credit losses and this saw the NPL coverage increase to 57.4 percent from 54.5 percent in Q1’2019 as banks adopted a cautious stance on the back of the expected impact of the COVID-19 pandemic.
Cytonn also ranked I&M favourably on future growth prospects with the bank scoring highly on the different parameters used to gauge potential.
During the quarter, I&M’s return on average equity stood at 17.5% while Core Earnings Per Share stood at 27%.
Co-operative Bank emerged top in the franchise ranking due to high-efficiency levels as evidenced by a low Cost to Income ratio which came in at 58.1% vs an industry average of 61.4%.
KCB Group came third and Equity Group fourth with franchise scores of 56 and 60 respectively.
Diamond Trust Bank Kenya took the top position from a future growth opportunity perspective with Cytonn observing that the bank presents the highest upside with an expected total return of 149.3%
Absa Bank was sixth, Stanbic came seventh, Standard Chartered took eighth position and recently merged NCBA took ninth place.
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 lack of proper cost-efficiency structure
Asset Quality
Asset quality deteriorated in Q1’2020 with the gross NPL ratio increasing by 0.9% points to 11.3% from 10.4% in Q1’2019.
“This was high compared to a 5-year average of 8.5%. As reported by most of the banks, the deterioration in asset quality was attributable to increased provisioning across the industry to proactively manage risks given the tough economic conditions,” reads the report.
Regulation
On the regulatory front, The Central Bank of Kenya on March 27, 2020 provided commercial banks and mortgage finance companies with guidelines on loan reclassification, and provisioning of extended and restructured loans.
“Banking Circular No 3 of 2020 stipulated that banks would be allowed to extend loan repayments for their customers for a period not more than one year, the cost of restructuring and extension of loans would be met by the banks and the banks would have to report any restructuring in relation to the COVID-19 pandemic to the Central Bank monthly”, said MaryAnne Ng’ang’a, Analyst at Cytonn Investments. .
