KCB ranked most attractive bank for investors

Kenya Commercial Bank (KCB) has been ranked as the most attractive bank in Kenya, a position it has retained since 2015. This is supported by a strong franchise value and also intrinsic value score.

The franchise value measures the broad and comprehensive business strength of a bank across 13 different metrics while intrinsic score measures the investment return potential.

The KCB Group was ranked 1st position on the back of a high return on average equity of 20.3% compared to an industry average of 18.4%, as well as an optimal loan to deposit ratio of 84.3%, compared to an industry average of 76.8%.

Releasing its quarter 1 of 2018 banking sector report today, Cytonn Investments ranked the National Bank of Kenya lowest overall.

The report has ranked Equity Group 2nd, recording the highest return on equity at 24.7 percent and having the best asset quality, with the lowest Non-Performing Loans ratio of 6.5 percent compared to the industry average at 9.5 percent.

Diamond Trust Bank climbed 3 spots to Position 4 from Position 7 in 2017 Banking Sector Report, owing to its good asset quality. The bank had the second lowest gross Non-Performing Loan (NPL) ratio at 7.1%, lower than industry average of 9.5 percent, and good corporate governance structure, ranking second in the Cytonn Corporate Governance Index (CGI).

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The report themed ‘Diversification and Efficiency key to growth amidst tighter regulations’ comes even as the Kenya banking sector witnessed a challenging operating environment following the capping of interest rates coupled with tighter regulations.

Cytonn Investment, an independent investment management firm analyzed the results of the listed banks using their Quarter 1 2018 audited results 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.

Cytonn’s Senior Investments Manager Maurice Oduor said asset quality remains a concern, and that banks should continue to put more emphasis on alternative revenue streams to boost their Non-Funded Income and adopt an efficient operating model through alternative banking channels and digitization i.

“We have looked at three key focus areas, which are regulation, diversification and asset quality in this report. With a tighter regulated environment following the capping of interest rates and adoption of International Financial Reporting Standards (IFRS)9 , revenue sources diversification and asset quality management will prove to be the key growth drivers in the banking sector,” he said.

The relatively challenging operating environment for the banking sector to persist in 2018, especially with the coming into effect of IFRS9.

Senior Investment Analyst at Cytonn Caleb Mugendi added that the IFRS 9 takes a forward-looking approach to credit assessment, which will likely reduce capital positions for banks with poor asset quality, as they set aside provisions for both the performing and non-performing loans. This, he noted, is likely to impact negatively on banks’ earnings.

“With the deteriorating asset quality, evidenced by the rising non-performing loans, we expect banks to be more prudent in loan disbursement, and consequently tightening their credit standards in order to address the concerns around asset quality and enhance cost rationalization measures, so as to protect their profitability,” Mugendi said.

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However, he noted that they have seen banks adjusting their business models with lending skewed mainly towards collateralized lending.

Kenya’s listed banks recorded a 14.4% growth in core Express Payment Systems (EPS) growth in 2018, compared to a decline of 8.6% in 2017, and a 5-year average growth of 6.7%.

Only Standard Chartered Bank and Housing Finance Group recorded declines in core EPS, registering declines of 12.5 percent and 58.4 percent, respectively.

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