Banking Sector Report – Outlook Promising as Banks Continue to Perform

The Banking sector is expected to remain well capitalized and liquid, with all metrics above the statutory minimum levels.

The market offers attractive entry points to the sector with Standard Chartered Bank and Co-operative Bank Ltd currently trading below 1.0x price-to-book multiples.

Equity Group Holdings and KCB Group plc have accelerated their pace in acquiring and integrating banks in the regional market as they seek to scale up their customer base and revenue streams.

According to Genghis Capital, Cooperative Bank’s revenue will be boosted by its MCo-op cash wallet that had 5.1 million registered customers as of 1Q21, having disbursed 138.6 billion shillings to date.

ABSA and Stanchart are following suit. ABSA Bank Kenya Plc plans to leverage technology to boost funds and manage costs as it invests 1.6 billion shillings in digital products.

Stanchart also launched its digital retail bank and may soon venture into digital micro-lending and credit card facility automation.

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Lenders are also banking on the expectation that the apex bank will approve their submitted risk-based pricing models. This is however an open-ended request.

Market Outlook

• Equities – The uncertainty-led slowdown in the equities market is expected to persist offering investors the chance to accumulate strong undervalued risk assets in the market.
• Fixed Income – Expected to remain constructive on the middle segment of the curve due to the ongoing uncertainty. The high liquidity in the market is also supportive of lower durations.
• Currencies – The market will frontload USD strengthening in the near term as it anticipates the Fed to eventually adopt a more hawkish stance.
• Commodities – Some price retracement off gold’s recent multi-year highs is expected. On a more fundamental basis, as countries across the globe have started to re-open, there’s a likelihood of a diminished safe-haven appeal role of the precious metal.

Trading Ideas

• BUY on ABSA, target price of 11.94 shillings – The Bank recently launched its WhatsApp Banking platform as it continues leveraging digitization to boost income and cost optimization, anchoring the stock back as a dividend play. It is anticipated that its stellar performance (EPS up 23.7% y/y in 1Q21) will continue into the coming quarter.
• BUY on FXD4/2019/10 between 12.15% – 12.20% levels – The rejection of 15.3 billion bids placed for FXD3/2019/10 bond re-opening in last week’s primary bond sale will likely spur interest in the short and medium tenor papers. The FXD4/2019/10 unit is attractive due to its relatively higher coupon rate of 12.28% compared to 11.52% in FXD3/2019/10, for a similar duration.

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