Banking Sector Leads Decline for the Month of August

During the month of August, NASI and NSE 20 continued on a downward trend, falling by 3.8% and 5.2%, respectively. However, foreign investors were net buyers, with inflows of Kshs 927 mn during the month. The banking sector led declines after most of them reported earnings that were below market expectations.

Some of the key losers included: Standard Chartered down 13.7%, NIC Bank down 13.1%, Kenya Commercial Bank down 12.0%, Co-operative Bank down 7.6% and Barclays down 7.5%. Since their February peak, NASI and NSE 20 have declined by 19.6% and 24.1%, respectively, while the decline on a year to date basis stands at 12.3% and 18.3%, respectively.

Banks released half-year results, recording a slow-down in growth. Overall, the banking sector grew at a 6.6% rate, compared to 15.8% in 2014, with the slowdown being attributed to poor economic performance on the back of uncertainty in the interest rate environment.

On the PAT y/y growth, National Bank of Kenya (NBK) and Co-operative bank registered the highest growth of 123.0% and 32.3%, respectively. NBK’s growth was due to a robust growth in non-funded income of 227%, driven mainly by sale of property. Net Interest Income (NII) grew by 18.8%, supported by a 30.6% growth in the loan book and 6.4% increase in deposits. Co-operative Bank’s performance was driven by a 19% y/y growth in NII, to Kshs. 11.8 bn from Kshs. 9.9 bn in H1’2014.

Total operating expenses declined by 4% y/y to Kshs. 9.0 bn, bringing the cost to income ratio (CIR) to 47%, from 59% in H1’2014. CfC Stanbic and Standard Chartered registered the biggest declines of 42% and 36%, respectively. CfC’s decline his was largely attributed to a decline in non-funded income (NFI), which declined by 33% y/y to Kshs. 3.3 bn thereby diluting the effect of the 2.0% increase in net interest income (NII).

Standard Chartered banks results were weighed down by a 51.2% increase in loan loss provisions. NII declined a marginal 0.1% y/y, while NFI fell by 31.2% y/y on account of a one off Kshs 1.2 bn gain last year owing to the bank’s sale of property. We shall be releasing our comprehensive banking report that will provide a detailed analysis of the banking sector H1’15 performance.

Listed insurance companies released their half-year results, registering mixed performance. While Kenya Re, Jubilee and CIC Insurance registering a y/y growth in earnings of 20.3%, 24.5% and 51.3%, respectively, the results were countered by declines of 8.9%, 32.5% and 77.7% by Liberty, Pan Africa and Britam, respectively. The declines were mainly as a result of the fair value losses on investments given the decline in the stock market and the increase in interest rates.

Insurance penetration in the country also fell to 2.9% in 2014 from 3.4% in 2013, mainly as a result of GDP rebasing. With the introduction of bancassurance by several financial institutions e.g. banks, as well as agriculture insurance and micro insurance, we expect an increase in the insurance uptake in the medium-term.

Given the change in the operating environment that we have witnessed in 2015, we carried out an analysis on the various drivers of the equities market in order to re-evaluate our view on the listed equities outlook. The table below highlights the different economic drivers, and their effects on the stock market’s performance: 

As shown in the table above, the operating environment has become more difficult for businesses to operate. While valuations are not as stretched as at the beginning of the year, (market valuation currently at 14x PE compared to 16x PE as at the beginning of the year) earnings growth is much weaker, and the operating environment continues to be unfavourable. Despite the fact that some of the above factors have already been priced into the market, as can be seen by a 13% YTD decline in NASI, we feel that the market is now purely a stock pickers’ market, with few pockets of value. As a result of this, we revise our view slightly downwards to “neutral with a negative bias” from “neutral”.

An excerpt of the monthly Cytonn Report