Rosy Earnings Season for Banking Sector, Genghis Market Outlook

The Central Bank of Kenya (CBK) reported better asset quality in the banking sector with Non-Performing Loan (NPL) ratio at 14.0 percent from 14.6 percent in March 2021 in its latest quarterly Credit Officer Survey report.

This points to improving economic conditions amid the COVID-19 pandemic. The improvement in the NPL ratio can be attributed to a 1.7 percent q/q decrease in Gross Non-performing loans at KES 435.3Bn as gross loans rose 2.3 percent q/q to KES 3.1Tn.

Further to this, the trade and real estate sectors witnessed an increase in advances during the quarter.

As banks continue releasing their 1H21 results, the overarching themes are higher operating income earned as well as the reduction of loan loss provisions.

With the loan restructuring window closed in March 2021, borrowers resumed suspended interest payments boosting interest earned by lenders.

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This could also be a result of the increased lending witnessed during the period. Additionally, lenders have cut loan loss provisions as asset quality improves thereby reducing expenses that ate into profits during a similar period in 2020.

Market Projections

• Equities – The uncertainty-led slowdown in the equities market is likely to persist offering investors the chance to accumulate strong undervalued risk assets in the market.
• Fixed Income – Genghis remains 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 – Expect some price retracement off gold’s recent multi-year highs. On a more fundamental basis, as countries across the globe have started to re-open. A diminished safe-haven appeal role of the precious metal should also be expected.

Trading Ideas

Risk-On Trades Out-Of-Consensus Trades Hold on KCB Group – Target price of KES 51.62 (+7.7 percent upside) The Group’s acquisition plans in Rwanda and Tanzania are almost complete with the expectation of Banque Populaire du Rwanda bank’s integration this quarter. It is anticipated that stellar performance (EPS up 101.9 percent y/y in 1H21) will further cement pre-covid dividend payments for FY 2021.

Buy IFB1/2021/18 between 12.10 percent – 12.15 percent levels Following the announcement of September’s primary bond offering – IFB1/2021/21 – expect some repricing on the off-the-run infrastructure bond papers. The entry levels for IFB1/2021/18 at 12.10 percent – 12.15 percent levels; c . 10 – 15bps above last week’s closing yield (11.98 percent), are also quite attractive.