Acquisitions, only way forward for Foreign Banks coming to Kenya – Cytonn Investments

Kenya’s listed banks recorded an improved Earning Per Share (EPS) growth in Q3’2016 on the back of an improved macroeconomic environment according to Cytonn Investments Report.

The Kenya Banking Sector Q3’2016 Report, themed “Transition continues, to a more stable sector, in an era of increased regulation”, saw interest rates decline to below historical average levels as evidenced by the 91-day T-bill rates declining to 8.4 percent , compared to its 5-year average of 10.4 percent.

“With GDP growth prospects for 2016 at 6.0%, and the banking sector contributing 10.1 percent to GDP, a strong growth exhibited by the sector is beneficial to drive economic growth,” said Maurice Oduor, the Investment Manager at Cytonn Investments.

“However, credit to the private sector has been on a consecutive decline for 15-months, with the International Monetary Fund (IMF) warning that this will probably drag the country’s economic expansion next year,” he added.

Oduor said after the interest capping environment, they have continued to note the inconsistency between what Central Bank is forcing banks to do by reducing interest rates, and the higher yield that government is accepting in treasury securities auction.“Banks are now looking for safer avenues and less risky opportunities, thus keep allocating more to treasury instruments as opposed to funding the private sector further reducing credit growth to the private sector and a slow growth in the economy.”

Elizabeth Nkuku, partner at Cytonn investments on Kenya’s debt sustainability, called for more alternatives by the National Treasury restructuring.

“It is a bit worrying that we are above the 50 percent to the GDP ratio. There is need to increase the tax revenue if we have to sustain the current trend where we borrow to consume. It would have been different if it was for capital expenditure.”

“The 50-60 percent is not a big issue now but we are almost at the amber level,” she added.

Her sentiments are after the National Treasury’s intention to raise an additional KSh 59 billion from the domestic market this fiscal year.

The 2016 Budget outlook paper (BROP) released by the Treasury shows the State intends to borrow a combined domestic and foreign debt of KSh 582.2 billion by the end of the fiscal year, revised down from KSh 698.4 billion as stated in the 2016/17 budget. The changes are expected to reflect in the 2016/17 Supplementary Budget.

In the report, consolidation and acquisitions was the only way forward for the local banks and foreign banks intending to acquire banks respectively.

“For local bank acquisitions, the average price-to-book multiple is at 2.0x, with an average acquisition stake of 77 percent.  With the moratorium on licensing new banks still in play, all international banks and investors looking for exposure to the Kenyan banking sector will have to enter via way of acquisition.”

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“The sector is still in transition. Key issues such as increased loan loss provisioning and the regulated loan and deposit pricing framework, will transition the industry into an environment where only the innovative banks with diversified revenue streams will survive, with the remaining banks forced to either merger or be acquired,” reads the report.

The Central Bank of Kenya plans to resume licensing of new commercial banks “very soon” however, there is no time frame when the moratorium will be lifted.

CBK freezed licensing of new lenders in November 2015,following concerns that most local banks were under capitalised and could not withstand competition in agreement with Cytonn Investments, “Kenya is over-banked, with 41 commercial banks (2 in receivership) serving a population of 44 million people.”

Highlights of the report:

Core earnings for 2016 is likely to be higher than 2015 since as at Q3’2016, the earnings growth was at 15.1% compared to the 9.7% recorded in Q3’2015. Though there could be some negative effects as result of the interest rate cap but this is not expected to significantly affect banks’ earnings for the year 2016

Deposits grew faster than loans at 7.7% and 6.3%, respectively, but lower than the 5-year averages of 14.9% and 16.7%, respectively

The levels of NPLs remains a concern within the banking sector with loan loss provisions growing at 93.8% and 175.9% for the non-listed and listed banks, respectively. We expect the level of provisioning to stabilize going forward as banks adopt more stringent risk assessment framework

Read: What is the Truth behind Non-Performing Loans: Employees or Customers?

Equity Group emerged top in the franchise value rankings, with National Bank coming last.

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