Analyst tips Co-op and KCB to soar above NSE performance

Coop Bank CEO Gideon Muriuki

Investment banking firm Renaissance Capital is tipping stocks of three commercial banks to rise in the long term, offering those who buy them now a profit.

In their update research on equities, the firm sees stocks of KCB, Co-operative Bank and Equity Bank defying the current uncertainties on the market to rebound. "We increase our TP (target price) for Equity to Sh33.90 (from Sh31.50), for KCB to Sh37.6 (from Sh33.90) and for Co-op to Sh16.0 (from Sh15). We maintain our outperform ratings on KCB and Co-op Bank," says Renaissance report that gives Equity a market perform rating.

Outperform rating is given to stocks which analysts believe will record a performance above the stock market average. On average, Renaissance has increased its target price projections on the three bank stocks by 8 per cent even as it cites that currently, their price to book ratios are below seven-year lows.

Price to book ratio or simply P/B ratio is used to compare a stock's current market value to its latest quarter's book value per share. Therefore, a lower P/B ratio could mean a stock is undervalued. Year-to-date, Equity Bank's share price is down 22 per cent, KCB has lost 19 per cent while Co-operative has shed 14 per cent. In the analysis, Renaissance believes that the current performance of the three stocks and other banking counters stems from investors' concern that came with the setting in of a regime of capped cost of credit.

However, this is expected to clear with time. In the analysis, KCB's upside potential is 54.7 per cent while Cooperative bank is 40.4 per cent. This means the two stocks have the ability to climb above their current trading price to Sh37.60 and Sh16 respectively. For Equity Bank, its share is being tipped to rise by about 36.7 per cent to Sh33.90. This makes the three shares attractive to buy now. "We maintain our market perform rating as we would like to keep an eye on how the bank [Equity], with its focus on small and medium-sized enterprises, fares in an interest-rate-cap environment," notes Renaissance.

The positive outlook comes at a time NSE20 index has hit seven-year low while NSE All Share Index is at four-year low. For banking sector, the analysts say its performance is linked to a several challenges. "Investors are uneasy about the short-term outlook for the Kenyan banking sector, with concerns ranging from the upcoming general elections to recent weakness in the Kenyan shilling, monetary policy uncertainty, a build-up of asset quality stress and liquidity challenges across the sector," observes the report.

This, added to low public sector credit, surge in price of crude oil, drought and increased migration to digital offerings, Coop Bank CEO Gideon Muriuki, says make 2017 a crunch year. Muriuki is upbeat sustained good performance will retain the attractiveness of the share. He said despite 2016 being a tough year for banks, Co-op Bank reported a 25 per cent surge in profit before tax of Sh15.2 billion in the third quarter, while net profit grew by 22.3 per cent to Sh10.5 billion.

"The bank has in recent years undertaken significant business transformation dubbed "Soaring Eagle" project that has given it a lean and mean edge to compete effectively even in turbulent times," said Muriuki in a comment on Renaissance's outlook.