I&M Bank Ranked The Most Attractive Bank In Kenya

Cytonn Investments has today released its FY’2021 Banking Sector Report, which ranks I&M Holdings as the most attractive bank in Kenya, 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.

The report themed “Reduced Loan Provisions Spur Banking Sector Recovery in 2021” analyzed the FY’2021 results of the listed banks. “The Asset Quality for the listed banks improved in FY’2021, with the gross NPL ratio declining by 1.2 percentage points to 12.3 percent, from 13.5 percent in FY’2020.

We however note that despite this marginal improvement in the asset quality, the NPL ratio remains higher than the 10-year average of 8.1 percent.

The listed banks’ management quality also improved, with the Cost to Income ratio improving by 16.9 percentage points to 56.4 percent, from 73.3 percent recorded in FY’2020, as banks continued to reduce their provisioning levels following the improved business environment during the period.

Consequently, Core Earnings per Share (EPS) recorded a weighted growth of 82.9% in FY’2021, from a weighted decline of 26.8 percent recorded in FY’2020.

The performance is however skewed by the strong performance from ABSA, NCBA Group, and Equity Group, which recorded core EPS growths of 161.2, 123.7, and 99.4 percent, respectively, from their 2020 full-year performance”, said Justin Mwangi, Senior Investment Analyst at Cytonn Investments.

Four key drivers shaped the Banking sector in FY’2021, namely; Regulation, Regional Expansion through Mergers and Acquisitions, Asset Quality, and Capital Raising.

“Mergers and Acquisitions remained a key theme in FY’2021, with the current environment providing opportunities for bigger banks with a sufficient capital base to expand and take advantage of the low valuations in the market to further consolidate and buy out smaller banks.

The COVID-19 pandemic exposed the weak banks in the industry which might need to be acquired by larger banks in order to boost their capital adequacy and liquidity ratios to the required minimum statutory levels and as such, we expect to see continued consolidation in the banking sector as the weaker banks are merged with the big banks to form a stronger banking system.

We also expect to see Kenyan banks continue to diversify into other African regions as they look to reduce their reliance on the Kenyan Market and distribute risks as well. Key regional acquisitions during 2021 included; (i) I&M Group completing the 90.0 percent acquisition of Orient Bank Limited Uganda (OBL) share capital in April, (ii) Equity Group acquiring an additional 7.7 percent stake in Equity bank Congo (EBC), in May, to take their total ownership in EBC to 94.3 percent, and, (iii) KCB Group acquisition of 62.1 percent of Banque Populaire du Rwanda Plc (BPR) shares in August 2021”, said Stellah Swakei, Investment Analyst at Cytonn Investments.

I&M Holdings’ rank recorded an improvement in the overall ranking to position 1 from position 3 in Q3’2021 attributable to a decline in the bank‘s Gross NPL ratio to 9.5 percent, from the 10.2 percent recorded in Q3’2021, leading to an increase in the bank’s franchise value score, coupled with an improvement in the bank’s Cost to Income ratio, which recorded a 2.2 percentage points decline to 59.9 percent from 62.1 percent recorded in Q3’2021. Co-operative Bank’s rank improved to position 2 from position 6 in Q3’2021, attributable to an increase in the bank’s return on average equity to 17.3 percent, higher than the 14.2 percent recorded in Q3’2021.

The bank’s Net Interest Margin ratio remained constant at 8.5 percent, which was the highest in the listed banking sector. KCB Group’s rank declined to position 3 after being ranked position 1 in Q3’2021, mainly due to a deterioration in the bank‘s asset quality, as the Gross NPL ratio rose to 16.6 percent, from 13.7 percent recorded in Q3’2021.

Table 1: Listed Banks Franchise and Intrinsic Ranking

The table below ranks banks based on franchise and intrinsic ranking which compares metrics for efficiency, asset quality, diversification, growth, and profitability, among other metrics.