Genghis Recommends a Buy on Banking as Sector Posts Improved Earnings

Genghis Capital has recommended a buy on the banking sector based on improved earnings with most banks returning to pre-pandemic levels as witnessed in 1Q21 results.

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.

Genghis anticipates that Cooperative Bank’s revenue will be boosted by its MCo-op Cash wallet that had 5.1 million registered customers as at 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.

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

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.

With the recovery of 1Q21 banking sector earnings, the expectations include:

1. Positive growth in FY21F earnings: Earnings per Share (EPS) is expected to grow by an average of 34.1 percent across our coverage, mainly due to a gradual reduction in provisions and interest income growth from the resumption of restructured loans as economic conditions improve. The cost to income (CTI) metric is anticipated to decline an average of 6.2 percent y/y across the banks in our coverage on digitization as transactions move to alternative channels with a non-funded income estimated to grow an average of 13.3 percent y/y across our universe.
2. Gradual growth in Net Interest Income (NII): With the expiry of the loan restructuring measures in March 2021, it is expected that loans will return to their normal servicing terms. As per the CBK data provided 57.0 percent of the banking sector’s loan book valued at 1.7 trillion shillings were restructured as at FY2020. By the end of February 2021, this amount had plunged to 569.3 billion shillings. This growth in NII may however be dampened by risk-off strategy by some lenders as they seek to strengthen asset quality. We anticipate Net Interest Margin (NIM) to decline 98bps across our coverage. The sector has elevated holdings in government papers whose yields have been coming off, coupled with the 125bps cut in Central Bank Rate (CBR) in March 2020.
3. Improving asset quality with 36bps drop in NPL ratio: As business conditions improve, Genghis Capital anticipates better loan management as enterprises pick up. Elevated levels of loan loss provisioning is anticipated; albeit falling by an average of 9.8 percent y/y across the covered sectors.

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