Planning to invest in the NSE? Consider these top picks for 2014

1. National Bank

Positives:  The new CEO’s strategy for the company has started to pay off, enabling NBK become more competitive. In the third quarter of 2013, the bank announced a net profit of Sh880.1 million compared to Sh402.3 million in a similar period a year earlier, a 118.7 per cent growth. The bank planned to open 10 branches by the end of 2013, create foreign subsidiaries and seek a larger share of the corporate debt market. It also plans to hold a Sh10 billion rights issue in 2014 to raise money to bankroll its domestic and regional expansion strategy. The bank is coming from a low base, it has a lot of upside potential

Negatives: Operating expenses remain high. It faces stiff competition from banks and its loan/deposit ratio is relatively low compared to the industry average.

2. Co-operative Bank

Positives: The newly rolled out agency model augurs positively in terms of cost management, non-funded income growth and balance sheet growth. Currently, the bank has over 5,200 agents. Its Capital Adequacy Ratios (CARs) are way above the required minimum statutory levels and it maintains a sufficient capital buffer to aggressively support its asset growth going forward. The strategic joint venture in South Sudan will drive growth in the long term. Co-op Bank also has a unique model of retailing banking services through saccos, which enables the bank provide wholesale financial services to over 418 outlets with over 8 million members across the country. The lucrative investment in CIC Insurance continues to offer a hefty kickback.

Negatives: Its branch and regional expansion will be a strain.

3. Equity Bank

Positives: The bank was the pioneer in the agency banking model with over 9,000 active agents. Agency banking is now active in Tanzania and Rwanda, which has helped it grow the banking network at a very limited cost. The bank is refocusing its investment banking efforts towards SMEs advisory by offering tailored banking services and products. SMEs approximately contribute 47 per cent of the bank’s total loan book. It plans to increase its focus on bancassurance, relying on its vast network to push its insurance products — the bank currently has over 150 branches. It partnered with Google Kenya and launched Beba Pay, a payment card for bus fare. The Government has indicated that transport vehicles will go cashless by July 2014. Being a leader in retail banking with 8.3 million customers, there is still room to grow this client base.

Negatives: Equity Bank’s South Sudan operations — there is high potential from this market, but current political uncertainties poses a huge challenge for business. There are also new players in the financial market like GT Bank of Nigeria, and others replicating the agency model. Safaricom’s partnership with CBA to offer M-Shwari risks eating into its client base. The bank’s book quality has deteriorated to 2.29 per cent as at June 2013 from 0.7 per cent December 2012. If the trend does not change, it might be forced to incur expensive write offs.

4. Kenya Reinsurance

Positives: The growing insurance business in the region offers substantial growth prospects for the company. It is also in the process of constructing a Sh1.5 billion ultra-modern building in Upper Hill to satisfy the demand for space in Nairobi’s new commercial hub. Regional and product diversification augur positively on its revenues, and it currently has a financial strength rating of B+ (Good). It has a well-qualified management team, expected to enable it meet most of its targets.

Negatives: Kenya Re faces stiff market competition from existing players.

5. Kenya Power

Positives: It plans to increase capital expenditure to reinforce and upgrade existing system lines and increase customer connectivity. The company is adopting online systems in terms of customer applications for power connectivity, reducing paper and printing costs. It will decentralise its services to improve efficiency and customer satisfaction. Kenya Power is  currently building a smart network to boost maintenance programmes, fast restoration of supply and increase operational efficiency.

Negatives: The high cost of power connections makes it hard for Kenya Power to connect homes in rural areas at the current fees. The Government declined their request to review charges upwards. System losses are still a challenge, as are commercial losses arising from faulty metering systems and inaccurate readings due to human error. The company is also losing transformers to vandals.

— Old Mutual Securities