Following the deteriorating asset quality brought about by a challenging operating environment, and the capping of interest rates, the banking sector realized decreased profitability in 2017.
Cytonn Investments did an overall ranking report on a weighted average ranking of Franchise value, which accounts for 40 percent and Intrinsic value accounting for 60 percent.
The Intrinsic Valuation was computed through a combination of valuation techniques, with a weighting of 75.0 percent on Discounted Cash-flow Methods and 25.0 percent on Relative Valuation.
KCB group topped the list in the composite ranking of the banks with a weighted score of 23. The total franchise value and intrinsic value score stood at 53 and 3 respectively. It was followed by Equity Group with 26.8, 8.0, and 55.0 as the weighted score, the franchise total value score, and intrinsic value score respectively.
I&M Holdings climbed up 4 spots to Position 3 from Position 7 in the third quarter of 2017 Banking Sector Report, owing to its efficiency, with the bank having the lowest Cost to Income ratio at 56.2 percent, lower than industry average of 67.4 percent, and good deposit mobilization, with a deposit per branch of 4.0 billion shillings, much higher than the industry at 2.7 billion shillings.
With a weighted score of 30.0, the Co-operative bank came fourth registering an intrinsic value of 6.0 and a franchise total value of 66.0, closely followed by NIC Bank with a franchise score of 74, intrinsic value of 1.0 and a weighted score of 30.2.
Barclays Bank dropped 3 spots to Position 6 from Position 3 in the Q3’2017 Banking Sector Report, due to a high Cost to Income ratio at 65.8 percent and relative expensive valuation, with the bank trading at a P/TBv of 1.6x.
It registered franchise, intrinsic and weighted values of 71.0, 5.0 and 31.4 respectively. Meanwhile, Diamond Trust Bank was number 7 with a weighted score of 32.4 and a franchise value of 78.0.
Standard Chartered Bank, Stanbic Holdings, National Bank of Kenya, and HF Group attained positions 8, 9, 10, and 11 in that order. The franchise value score, intrinsic value score, and weighted overall score were 77.0, 11.0, 37.4 for Standard Chartered, 85.0, 9.0, 39.4 for Stanbic Holdings, 111.0, 11.0, 48.6 for National Banks and 117.0, 10.0, 52.0 for the HF Group respectively.
Despite the challenges and as the private sector remains subdued, the anticipation is that the key factors banks will consider going into 2018 are diversification, prudence, and efficiency. For an in-depth review, visit here.