Kenya’s banking sector recorded growth in the first half of 2015, underpinned by efficiency and embracing alternative banking channels. The Cytonn Investment’s report further adds that the growth of companies in the region is further ensuring that they record improved growth.
The introduction of the Kenya Bank Reference Rate (KBRR) in July 2014 also improved the standing of the banks. Achieving KBRR is by determining the average of the Central Bank Rate with the Treasury Bills over a period of three months. As a result of this introduction, banks have been fairly good at protecting their margins regardless of the rate environment.
The report says
“The banking sector’s aggregate balance sheet grew by 6.8 percent from sh3.37 trillion in March 2015 to sh3.60 trillion in June 2015, faster than the 3.4 percent increase.”
The report further suggests factors that will drive the growth of banks in the remaining part of the year to ensure they record profitability as increased use of alternative service delivery channels like M-benki which was launched by KCB and Safaricom, and M-shwari which was a partnership between Safaricom and CBA. In addition there was increased retail market largely because of consumption expenditure and an increase in the percentage of the population which will require banking services, operational efficiency and d evolution.
On devolution, a recent meeting between the Deputy President and the Council of Governors agreed to set up mechanisms to ensure that counties can borrow from banks. This will likely further drive growth of banks in the coming years.
The report on all the 42 banks in the country was informed by Cytonn’s need to be able to recommend to their investors which banks are the most stable from a franchise value and from a future growth opportunity perspective.
In the report, Equity Bank ranked top, ranking high in return on capital, efficiency and revenue diversification. They predict that with the planned acquisition of ProCredit bank (Congo) and the roll out of Equitel which will the stock has an upside of 27.9 percent (including dividend yield)
Standard Chartered Bank ranked the second highest overall, ranking high in return on capital and deposit mobilization despite being weighed down by low revenue diversification.
Barclays Bank had the highest net interest margin attributable to the more expensive loans. The stock has a 20.7 percent upside mainly attributable to their aggressive entry into the SME market.
The report further states that National Bank of Kenya, despite being associated with the Government, was the second most inefficient bank in terms of cost containment, operating at cost to income ratios of 54.3 percent. In addition, they have the lowest quality of assets in their loan portfolio, as can be seen by their NPLs which are 9.5 percent of their total loan book.
Housing Finance ranked the lowest overall. It registered poor profitability , with the Return on Average Capital Employed (ROACE) at 12.5 percent. ROACE is defined as income for the period adjusted for after-tax interest expense as a percentage of the average capital employed for the period. Capital employed consists of total equity, current debt and non-current debt.
It also had their Net Interest Margin (NIM) at 7.1 percent, which was the third lowest in the market. NIM is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. It is similar to the gross margin (or gross profit margin) of non-financial companies. In addition, Housing Finance are hampered by liquidity issues, with a loan to deposit ratio of 133.5 percent.
Kenya there are a total of 42 commercial banks, 12 micro-finance banks and 1 mortgage finance institution. It has a high relative ratio of banks to the total population, with the 42 commercial banks serving a country of 44 million people.