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Hold bank stocks, analysts suggest to Kenyans

FINANCIAL STANDARD
By Patrick Alushula | April 19th 2016

NAIROBI: Standard Investment Bank (SIB) analysts have recommended a hold decision on most listed bank stocks.

In an analysis compiled last week, the investment bank’s researchers looked at 2015 earnings for the 11 banks listed at the Nairobi Securities Exchange (NSE).

The report recommends that investors hold stocks of Co-operative Bank, Diamond Trust Bank and Standard Chartered Bank. Only Equity Bank has a buy decision.

However, the analysis notes that stocks for most banks — Barclays, CfC Stanbic, DTB, I&M, KCB and NIC — are trading at discounted prices. This means they are below their market value.

Of the stocks analysed, Equity and StanChart are trading at a premium, meaning they are above market prices, while Co-op Bank is the only one trading fully priced.

“Co-op Bank’s share price has outperformed the sector over the last two years, cheered on by sustained above-average growth, but below peer NPL [non-performing loans] ratio and increased investor engagement,” said the investment bank.

Further, in the last financial year, Co-op Bank’s shares declined the least (10 per cent year on year).

Most expensive

Currently at a 30 per cent premium, StanChart is ranked the most expensive bank stock after Equity. But its year-on-year performance makes it the most underperforming, with a slump of 41.8 per cent.

However, the lender’s stock has begun the year in good form, and has gained the most so far at 18.5 per cent as at March 31. Down 17.6 per cent, Barclays’ shares have declined the most. In early March, Barclays PLC announced plans to sell down its 62.3 per cent stake in Barclays Africa Group, which owns 68.5 per cent of Barclays Kenya.

The SIB analysts added that StanChart’s ability to sustain similar returns is hinged significantly on loan loss recoveries, and optimal balance between growth and dividend payouts.

It had a disappointing year owing to 367.5 per cent in loan loss provisions last year from 2014.

According to Faith Waitherero, one of the analysts who prepared the review, the performance of StanChart picked up significantly after the announcement of a bonus issue.

In general, during the 2015 financial year, earnings per share (EPS) growth for the banking industry slowed for a fifth straight year to 4.3 per cent, as year-on-year loan loss provisions surged by 121.1 per cent.

“We expect to cut our 2016 financial year EPS growth estimates across the board to reflect persistent weaknesses in loan quality,” said SIB analysts.

They based this projection on the fact that the NPL ratio had hit an eight-year high of 6.8 per cent by the end of February.

The analysts additionally believe that heightened regulation will not be disruptive to the sector since banks have shown willingness to co-operate with the Central Bank of Kenya.

Overall, however, they retained a buy recommendation for banking stocks.

“We retain our buy recommendation for the sector. Against our unadjusted fair values and current prices, sector upside stands at 27.6 per cent — significant enough upside to withstand expected downward revisions in forecasts,” concludes the investment report.

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