KCB Remains the Most Attractive Bank in Kenya – Cytonn Report

KCB Group has been ranked as the most attractive bank in Kenya according to Cytonn Investments Q1’2018 Banking Sector Report.

KCB has been able to retain the since 2015, supported by a strong franchise value and intrinsic value score.

The franchise score measures the broad and comprehensive business strength of a bank across 13 different metrics, while the intrinsic score measures the investment return potential.

KCB Group ranked top on the back of a high return on average equity of 20.3 percent compared to an industry average of 18.4 percent, as well as an optimal loan to deposit ratio of 84.3 percent, compared to an industry average of 76.8 percent.

Equity Group ranked 2nd recording the highest return on equity at 24.7 percent and had the best asset quality, with the lowest Non-Performing Loans ratio of 6.5 percent compared to the industry average at 9.5 percent.

Equity Bank’s ranking was largely pulled back by its expensive market valuation of 2.5x, compared to an industry average of 1.6x or KCB Group’s 1.5x.

Diamond Trust Bank climbed 3 spots to Position 4 from Position 7 in our FY’2017 Banking Sector Report, owing to its good asset quality, with the bank having the second lowest gross NPL ratio at 7.1%, lower than industry average of 9.5 percent, and good corporate governance structure, ranking second in the Cytonn Corporate Governance Index (CGI).

National Bank of Kenya, on the other hand, ranked lowest overall, ranking last in the intrinsic value score.

According to Cytonn’s Senior Investments Manager Maurice Oduor, the Kenyan banking sector has witnessed a challenging operating environment, following the capping of interest rates, coupled with tighter regulation.

The report themed ‘Diversification and efficiency key to growth amidst tighter regulation. Asset quality remains a concern’, analyzed the results of the listed banks using their Quarter 1 2018 audited results so as to determine which banks are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective.

“Banks will continue to put more emphasis on alternative revenue streams to boost their Non-Funded Income and adopt an efficient operating model through alternative banking channels and digitization in order to remain profitable under the tough operating environment,” said Maurice Oduor.

Maurice Oduor noted that they had looked at three key focus areas; regulation, diversification, and asset quality in the report.

“With a tighter regulated environment following the capping of interest rates and adoption of IFRS 9, revenue sources diversification and asset quality management will prove to be the key growth drivers in the banking sector,” added Maurice.

Kenya’s listed banks recorded a 14.4 percent growth in core EPS growth in Q1’2018, compared to a decline of 8.6 percent in Q1’2017, and a 5-year average growth of 6.7 percent.

Standard Chartered Bank and Housing Finance Group were the only banks that recorded declines in core EPS, registering declines of 12.5 percent and 58.4 percent, respectively.

Deposits grew at 9.4 percent y/y, a faster rate than loans, which grew by 3.2 percent.

The loan growth came in lower as private sector credit growth remained low at an average of 2.4 percent, below the five-year average of 14.0 percent, with banks adopting a more prudent credit risk assessment framework to ensure quality loan books so as to manage the rising non-performing loans.