I&M Holdings is the most attractive listed bank in Kenya, supported by a strong franchise value and intrinsic value score, says a banking sector report by Cytonn investment.

According to the report themed “Deteriorating Asset Quality amid the COVID-19 Operating Environment,” which analyzed the first quarter of 2020 results of the listed banks I&M topped as the most attractive listed bank.

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.

“We note that asset quality deteriorated in Q1’2020 with the gross NPL ratio increasing by 0.9 percent points to 11.3 percent from 10.4 percent in Q1’2019. This was high compared to the 5-year average of 8.5 percent,” said David Gitau, investment analyst at Cytonn investments.

Gitau noted that in accordance with IFRS 9, banks are expected to provide both for the incurred and expected credit losses which saw the NPL coverage increase to 57.4 percent in Q1’2020 from 54.5 percent in Q1’2019 as banks adopted a cautious stance on the back of the expected impact of the COVID-19 pandemic.

The report noted that four key drivers shaped the Banking sector in Q1’2020, namely regulation, consolidation, asset quality, and capital conservation.

“On the regulatory front, The Central Bank of Kenya on March 27th, 2020 provided commercial banks and mortgage finance companies with guidelines on loan reclassification, and provisioning of extended and restructured loans as per the Banking Circular No 3 of 2020,” observed MaryAnn Ng’ang’a, analyst at Cytonn investments.

Additionally, the Central Bank stipulated that banks would be allowed to extend loan repayments for their customers for a period not more than one year, the cost of restructuring and extension of loans would be met by the banks and the banks would have to report any restructuring in relation to the COVID-19 pandemic to the Central Bank monthly.

I&M Holdings took the top position in the weighted score of both franchise and future growth opportunity perspective having a better capacity to generate profits from its core business.

While 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, 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 proper cost-efficiency structure.

The ten listed Kenyan banks include; I&M bank, Co-operative bank, KCB, Equity bank, DTBK, ABSA,Stanbic, SCBK, NCBA and HF group.

The banks recorded a 7.4 percent average decline in core Earnings per Share (EPS) compared to a growth of 12.2 percent in Q1’2019, the depressed earnings recorded in the listed banking sector is partly attributed to the tough operating environment occasioned by the ongoing Coronavirus pandemic.

The on going pandemic environment saw total operating expenses increase by 25.6 percent, outpacing the 10.3 percent increase recorded on total operating income.

The 10 listed Banks, recorded a deposit growth of 14.3 percent, faster than the 11.0 percent growth recorded in Q1’2019.

Interest expenses on the other hand rose by 11.4 percent, faster than 2.5 percent, recorded in Q1’2019.

The cost of funds, however, declined coming in at a weighted average of 3.1 percent in Q1’2020 down from 3.5 percent in Q1’2019 owing to the faster 12.2% growth average interest-bearing liabilities indicating that the listed banks were able to mobilize cheaper deposits.

The report notes that average loan growth came in at 14.1percent, which was faster than the 7.7 percent recorded in Q1’2019, with the growth in loans being accelerated following the repeal of interest rate cap in November 2019, coupled with increased demand in funding, as businesses demand working capital to operate in the tough operating environment as a result of the pandemic.

As of May 2020, the key sectors that had received funding by banks were tourism and hospitality sector, transport and communication sector, trade sector, real estate sector, and the manufacturing sector which received 34.5, 13.8, 12.4, 12.4 and 11.8 percent respectively of the total funding by banks.

Government securities, on the other hand, recorded a growth of 14.9 percent year on year, which was faster compared to the loans, albeit slower than the 16.1percent growth recorded in Q1’2019.

This highlights banks’ continued preference towards investing in government securities, which offer better risk-adjusted returns.

While interest income rose by 8.2 percent, compared to a growth of 3.6 percent recorded in Q1’2019.

The faster growth in interest income may be attributable to the 14.1percent growth in loans and increased allocation to government securities.

The net interest income increased by 7.4 percent slower than the 10.7 percent rise in average interest-earning assets.

The report notes that the Net Interest Margin (NIM) declined to 7.2 percent, compared to the 8.0% recorded in Q1’2019 for the whole listed banking sector.

While Non-Funded Income grew by 15.9 percent year on year, faster than 10.7 percent recorded in Q1’2019.

The growth in NFI was supported by the 24.5 percent average increase in total fee and commission income, which was faster than the 11.2 percent growth recorded in Q1’2019.