Cytonn Investments has listed KCB Group as the most attractive bank in Kenya in its Financial Year 2019 Banking Sector Report. This is supported by the group’s strong franchise value and intrinsic value score. The franchise score measures the broad and comprehensive business strength of a bank across 13 different metrics, while the intrinsic score measures the investment return potential.
I&M Holdings was rated second followed by Co-operative Bank of Kenya, Equity Bank Holdings Limited was fourth. Others in that order were Stanbic Bank Holdings Limited, Absa Bank, NCBA Group, Standard Chartered Bank of Kenya and Housing Finance Group.
KCB Group Plc took the top position from the future of growth opportunity perspective having a better capacity to generate profits from its core business.
Diamond Trust Bank Kenya took the top position from a future growth opportunity perspective; however, it had a weak franchise score moving it to position 5 on the weighted score.
Housing Finance 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.
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Covid 19 Time Series
The report, themed “Increased Consolidation in the Banking Sector”, states that the banking sector has witnessed a number of consolidation activities in the Financial Year of 2019 as players in the sector were either acquired or merged. The report also shows that Kenya remains overbanked as the number of banks is relatively high compared to the population.
“Increased consolidation will reduce the number of banks in the country which currently stand at 38, thus reducing the commercial banks to population ratio from the current 0.8x. We expect an increase in consolidation activities going forward which will lead to the formation of relatively larger, well-capitalized and possibly more stable entities,” says the report.
There has been a continued revenue diversification drive by Banks through growing of the Non-Funded Income (NFI) segment, which has seen the average revenue mix of Funded to NFI for listed banks in FY’19 coming in at 63:37 compared to 67:33 recorded in FY’2018.
“We however believe the higher growth was due to a correction from the decline in 2018 which was a one-off adjustment as a result of the implementation of the effective interest rate which required banks to amortize fees and commissions on loans over the tenor of the loans”, said Maryanne Ng’ang’a, Investment Analyst at Cytonn Investments.
The Kenya Shilling has however depreciated in the past week by 0.2 per cent against the US Dollar to close at Sh106.2, from Sh106.0 recorded the previous week, due to a slowdown in foreign dollar currency inflows from diaspora remittances and fewer offshore investors to meet dollar demand. On an YTD basis, the shilling has depreciated by 4.8% against the dollar, in comparison to the 0.5% appreciation in 2019.
According to the report, the shilling is expected to further depreciate in 2020 as a result of the rising uncertainties in the global market due to the Coronavirus outbreak, which has seen the disruption of global supply chains.
“The shortage of imports from China for instance, which accounts for an estimated 21.0% of the country’s imports, is likely to cause local importers to look for alternative import markets, which may be more expensive and as such higher demand for the dollar from merchandise importers,” Cytonn says.
Another cause of the depreciation of the shilling is the Subdued diaspora remittances growth following the close of the 10.0 per cent tax amnesty window in July 2019. The report foresees reduced diaspora remittances, owing to the decline in economic activities globally hence a reduction in disposable incomes. This coupled with increased prices of household items abroad might see a reduction in money expatriated into the country.
The key take-outs from the report were that the containment policies such as regional lockdowns, quarantines, and social distancing have led to the reduction of labour supply greatly affecting sectors that rely heavily on social interaction such as hospitality.
Continued fears raised by the ongoing pandemic has seen investors’ flight to safe havens increase. Consequently, the rush to liquidity has increased pressure on borrowing costs leading to the scarcity of credit to the financially constraint persons.
Failure to contain the virus through the implementation of stringent containment policies will most probably lead to prolonged economic distress with the global economy recovering slowly in 2021