Bank stocks defy rate cap to start rebounding

Francis Mwangi of SIB says as per their valuation, KCB should be trading at Sh40.

Bank stocks at Nairobi Securities Exchange are on recovery from the interest rate-capping rubble to defy doomsayers’ forecasts that the market could crush.

Hardly two months since President Uhuru Kenyatta’s shock move to cap the cost of borrowing at four per cent above Central Bank rate, banks’ stocks continue to recover. This is in contrast with the warnings from most market analysts.

Despite stocks of the eleven listed banks losing Sh84.7 billion in two days and six stocks succumbing to a 52-week low just after the interest rates were capped, the picture is now different. Five of the bank stocks are just single digit percentage away from the pre-interest rate capping prices. NIC Bank is just 3.5 per cent close to its price of Sh28.50 that it had prior to the cap.

According to ICEA-Lion Group Asset Management CEO Einstein Kihanda, investors have realised they had done panic selling. “The drastic drop in August was exaggerated and unwarranted. It was more of shock reaction than real assessment of the market fundamentals. This triggered massive drop in share price especially among foreign investors,” he said.

However, he added, once the implications of the decision started filtering into the market, there has been increased understanding and appreciation of the law making the stocks to recover.

Speculative demand

Standard Investment Bank (SIB) Head of Research and Investment Analysis, Francis Mwangi said prices have adjusted and it is now a good point to start buying. He says the panic selling in August was due feeling that profitability will decline but investors have now re-assessed their positions.

“When a negative thing comes up, investors react quickly. But once they fully digest what the change is all about, they may decide to get back because it is not as severe as they thought,” said Mwangi.

Since the cap was introduced, NIC bank stock has been on recovery. At Sh27.50, it is just 3.5 per cent shy the pre-interest capping price of Sh28.50. Other bank stocks closer to their August 24 prices are HFC Bank (4.4 per cent away), Cooperative Bank (5.3 per cent away), Stanbic Bank and National Bank which are 7.5 per cent and 7.6 per cent, respectively.

At Sh27.25, the share of KCB is 16 per cent away from the Sh32.75 it had about two months ago. It is at the same recovery at I&M Bank. Mwangi is tipping bank stocks to continue recovering.

“Based on our valuation, some of the banks will rebound beyond pre-interest capping price. For example, our valuation is that KCB should be trading at Sh40,” said Mwangi.

However, Cytonn Investment Manager Maurice Oduor whose firm had predicted that stock market would tumble as foreign investors exited banking stocks, downplays the rise in price of bank stocks. “It is not a recovery as such. It is just speculative demand coming in. But, if you are a long term investor looking at horizon of say five years, this is the time to buy because the impact of the law will have levelled off by September next year,” he says.

According to Kihanda, a lot of banks now are gaining clarity on the strategy of wading through the regime of capped cost of borrowing. They are adjusting their business models to the new environment.

 

Banks like Equity, Commercial Bank of Africa and National Bank of Kenya have since reinforced their focus on Small and Medium Size Enterprises as a way to increase their volumes. This move, supported by the fact that banks are already in the fourth quarter, Kihanda reckons, may minimse the impact of the cap.

“The actual impact on margins may not be felt now until around February 2017 when banks’ performance will start trickling in. This will allow investors to reassess their positions,” he said. In contrast, Cytonn’s Oduor says that despite the move, SME-oriented banks cannot count so much on SMEs to shove up revenues since they had for long viewed them as riskier and are even outside the capped rates.

“I don’t see this supporting profitability of banks unless banks become reckless. They are not likely to do this because it will encourage even higher non-performing loans,” says Oduor.