Investors Expected to Counter-check Valuations in Line with Estimated Impact of Banking Act

Equities

Market activity relatively slowed down last week when compared to its performance the previous week, as shown by the NSE indicators.

The value of shares traded declined to KES 1.7 billion on a volume of 75 million shares from KES 4.2 billion on a volume of 171 million shares exchanged previously. The NSE 20 Share Index ended the week slightly lower at 3206.12 points having dropped from 3208.25 points before.

The NSE All Share Index was up marginally to 131.58 points from 131.49 points earlier, while the NSE 25 Index added 14.28 points to close the week at 3458.79 points.

His Excellency the President of Kenya recently assented to the interest rate cap bill following the approval by parliament. The law capped interest rates at a maximum of 4 percent above CBR (currently at 10.5 percent) and provide a minimum deposit rate of 70 percent of CBR.

The Banking (Amendment) Act 2016 commenced on 14th September 2016, and the base rate for computation of interest rate was set to be the central bank rate. The signing of this act caused significant declines on the banks share prices during the first week of trading post- Act, as investors factored in the impact the Act would have on banks performance.

Investors are expected to counter-check their valuations in line with the estimated impact of the Act on the banks’ fundamentals.

Fixed Income

The government short term rates dropped for the third week running with the 91-day paper declining to 7.99 percent from 8.09 percent before and the 182-day paper decreasing to 10.81 percent from 10.94 percent previously. The 364-day paper reduced to 10.90 percent from 11.13 percent last week.

The T-bills slide may be attributed to the government’s move to tame the rates in line with the recent capping of lenders’ interest rates since banks are expected to opt to invest in government securities compared to lending out, due to the higher interest rates on 5+ tenor papers, whilst also mitigating on any riskiness that could arise from lending business.

Worth noting is that the domestic yield curve (above the 5yr tenor) currently lies above the interest rate floor, indicative that government securities are more attractive than interest expected to be made by banks on loans.

Read: The Kenyan Market in Focus: Review of the Week

Currencies

The Kenyan shilling was fairly stable against the USD this week as it managed to close the week at a mean of 101.29 shillings compared to an average of 101.20 shillings on the previous Friday. The shilling was mainly supported by hard currency inflows from non-governmental organizations and exports of horticultural products but was however under dollar demand pressure on the last trading of the week, from the energy and manufacturing sectors.  The local currency weakened mid-week against the Pound and the Euro after the ONS reported a 0.2 percent decline in month-on-month retail sales in the UK beating expectations for a decline of 0.4 percent, between July and August with non-food stores contributing the biggest decline with this anticipated to help the Sterling remain supported against the Euro and US Dollar.