Cytonn Investments has today released its H1’2021 Banking Sector Report, which ranks I&M Group as the most attractive bank in Kenya, supported by a strong franchise value and intrinsic value score.
This is the 6th time in a row that I&M has ranked in the first position mainly due to its solid fundamentals such as its positive management quality and asset quality during the period.
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.
ABSA Bank, which recorded an 846.0% EPS growth, was the most improved bank, coming in second from fifth in Q1’2021.
The report, themed “Reduced Provisioning levels Spur Earnings Growth” analysed the H1’2021 results of the listed banks. “There was a significant improvement in the performance of the listed banking sector during the quarter, with the Core Earnings per Share recording a weighted increase of 136.0% in H1’2021, compared to a weighted decline of 33.6% recorded in H1’2020.
The significant increase in earnings was mainly attributable to reduced provisioning levels by the listed banks following the relatively stable business operating environment during the period, with Loan Loss Provisions recording a weighted average decline of 24.8% in H1’2021, compared to a weighted growth of 233.2% in FY’2020 and 5.5% in Q1’2021.
The performance in H1’2021 is however skewed by the strong performance from ABSA, KCB Group, and Equity Group, which recorded core EPS growths of 846.0%, 101.9% and 97.7%, respectively.
Non-Funded income grew by 19.2%, compared to a decline of 1.1% recorded in H1’2020, attributable to the expiry of the waiver on fees and commissions on loans and advances issued by the CBK in March 2020.
Interest income recorded a 15.0% increase, compared to the 10.4% increase recorded in H1’2020, while investments in government securities grew by 12.4%, faster than the 11.7% loan growth recorded during the period.
Consequently, the Yield on Interest Earning Assets (YIEA) increased to 9.9%, from the 9.7% recorded in H1’2020, with Net Interest Margin (NIM) increasing to 7.4%, 0.4% points higher than the 7.0% recorded in H1’2020 for the whole listed banking sector.
Ann Wacera, Investment Analyst at Cytonn Investments said four key drivers shaped the Banking sector in H1’2021, namely; Regulation, Regional Expansion through Mergers and Acquisitions, Asset Quality Deterioration, and Capital Raising.
On the regulatory front, the loan restructuring window as per the Banking Circular No 3 of 2020 by the Central Bank of Kenya provided to commercial banks and mortgage finance companies on loan restructuring came to an end on March 2nd 2021, having seen loans worth Kshs 1.7 tn restructured, representing 57.0% of the banking sector’s loan book.
Mergers and Acquisitions remained a key theme in H1’2021, with the current environment providing opportunities for bigger banks with an adequate capital base to expand and take advantage of the low valuations in the market to further consolidate and buy out smaller banks.
“We also saw listed banks turning to borrowing from international institutions to not only strengthen their capital position but also boost their ability to lend to the perceived riskier Micro Small and Medium Sized Enterprises (MSMEs) segment in order to support the small businesses in the tough operating environment occasioned by the COVID-19 pandemic,” said Robert Karuiyi, Analyst at Cytonn Investments.
I&M Group took the top position in the Intrinsic Value rankings, indicating a superior future growth opportunity and investment return potential, while ABSA Bank took the top position in the Franchise Value Rankings for displaying a broad and comprehensive business strength and having a better capacity to generate profits from its core business.
ABSA Bank also recorded an improvement in the overall ranking, coming in 2nd, mainly on the back of the bank having the lowest NPL ratio of the listed banks at 7.9%, coupled with an improvement in the bank’s Cost to Income ratio, which recorded a 5.8% points decline to 55.5% from 61.3% recorded in Q1’2021.
While Standard Chartered Bank’s rank improved to position 6 from position 9 in Q1’2021, attributable to a 0.2% decline in its Cost to Income ratio, which contributed to an increase in the bank’s franchise value score, coupled with the bank’s NPL coverage of 80.1%, which was the highest in the listed banking sector.
Stanbic Bank’s rank declined to Position 7 from Position 4 in Q1’2021, attributable to a 1.7% points reduction in the bank’s Net Interest Margin to 4.4% from 6.1% in Q1’2021, coupled with a 12.7% points decline in the bank’s NPL coverage to 51.2%, from 63.9% in Q1’2020, and, HF 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 a proper cost efficiency structure.
