7 and 15-Year Tenors Demand Picks Up on Thursday

Activity on the secondary market picked up yesterday with bids between 7-year and 15-year tenors.

The longer-dated infrastructure bonds (IFBs) also saw a pickup in demand. The new IFB1/2017/7 begun trading yesterday with quotes at 12.20/12.10 percent early in the day and ending the day at 12.10/12 percent.

The market regulator came in yesterday to inject liquidity citing a skewed market. They received bids worth 14.6 billion shillings accepting 10 billion shillings at 10.18 percent.

The open market operations by the regulator in the week has charted an unclear path with mop-ups in the early days of the week before yesterday’s injection. The local unit as well has had a topsy-turvy week having touched a high of 103.90 on Monday against a low of 103.10 yesterday.

Stanbic Bank Kenya announced the best 3Q17 results in the banking sector thus far. EPS climbed 19.7 percent supported by higher non-interest revenue (NIR) growth (5.1% ) and cost cutting (operating expenses excluding impairments fell 5.0 percent y/y).

Notably, 3Q16 results were depressed by a 1.2 billion shillings readjustment related to its unit in South Sudan which had been impaired by hyperinflation in the country. Adjusted for the one-off, 3Q17 headline earnings were down 15.6% y/y. NIR/ Total income rose to 44.4% from 41.5% in 3Q17.

Similar to industry trend, Net interest income (NII) was down 6.5% y/y despite a 13.8% y/y (+2.9% q/q) growth in loan book and 3.2% lower cost of deposits. Standout feature was the 88.5% y/y rise in loan loss provisions noted from a sharp 43.6% q/q (48.4% y/y) rise in gross non-performing loans during the quarter.

A similar spike in NPLs was observed on DTK and COOP during three-month 3Q17 period and could be a partially systemic issue in the banking space. Liquidity ratio is the highest in the industry at 57.4% from 52.6% in 2Q17.

Against 3Q17 numbers, the recommended interim dividend of KES 2.93 per share and our target price of KES 95.18, we maintain our BUY recommendation with a 19.2% upside.