KCB, Co-op Bank ranked top in Cytonn H1’2017 Banking Sector Report

Kenya Commercial Bank and Co-operative Bank of Kenya maintained the top banks  according to the Half Year 2017 banking report released by Cytonn Investments.

KCB Group and Coop Bank maintained 1st and 2nd, respectively, Equity moved up 1 position to 5th, while NIC Bank moved up 1 position to 4th from Q1’2017.

According to the report themed ‘Transitioning to a more disciplined and efficient sector’, “The banking sector is shaping up to discipline in operations in the wake of increased loan loss provisioning and the capping of interest rates, as banks adjust their business models under the current regulatory framework.”

Co-operative Bank emerged top in the franchise value rankings, with National Bank of Kenya coming last.

“Coop Bank ranked 1st position on the back of a low cost to income ratio of 55.3 percent compared to an industry average of 66.0 percent as well as a low non-performing loans ratio at 4.7 percent, compared to an industry average of 11.5 percent.”

“Equity Group climbed up 1 spot to Position 4 from Position 5, due to impressive NIM at 9.7 percent, above industry average of 8.6 percent, and a Return on average Equity of 19.7 percent, above the industry average of 18.1 percent, with the bank adequately diversified with Non-Funded income at 42.0 percent, higher than the industry average of 31.3 percent.”

In the report, NIC Bank and KCB Group were ranked with  the highest upsides at 48.6percent and 40.6 percent, respectively.

“DTB dropped to 4th on the intrinsic value ranking, due to slower than expected growth in NFI growth, that grew by only 1.2 percent, while HF Group and Barclays rose 2 positions each to 3rd and 4th, respectively, with Barclays Bank recording a dividend yield of 9.6 percent.”

Listed Banks H1’2017 Earnings and Growth Metrics

The listed banks recorded a 13.8% decline in core EPS, compared to a growth of 15.5% in H1’2016. All the banks recorded negative growth, with KCB Group registering the least decline, a 0.2% decline, on the back of a 2.9% growth in Net Interest Income (NII),

Deposits grew at 14.4% during the first half of the year, a faster rate than loans, which grew by 9.3%. The loan growth came in lower as private sector credit growth slowed to 2.1% in H1’2017, below the government’s set target of 18.3%, with banks adopting a more prudent credit risk assessment framework to ensure quality loan books, which saw the loan to deposit ratio drop to 77.9% from 81.1% in H1’2016. This means that even as deposits were growing, banks were not lending,

Following the Banking Act (Amendment) 2015, banks saw their net interest margins (NIM) drop in H1’2017, which declined to 7.7% from 8.4% in H1’2016,

Exposure to government securities recorded an increase as indicated by investment in government Securities to deposit ratio, which increased to 32.2% from 29.4% in H1’2016 as banks allocated more funds towards the government, with government securities considered risk free, depriving the private sector of credit in the process,

The increase in the gross non-performing loan (NPL) ratio to 11.5% from 10.1% in H1’2016 highlights increased risks around asset quality in the sector, with banks having taken a prudent approach with the adoption of IFRS 9, and

Listed banks recorded a decline on return on average equity to 18.1% from 20.6% in H1’2016, as the banks’ profitability was affected by the capping of interest rates, which suppressed net interest income in the first half of the year.