Key Themes That Shaped The Banking Sector Performance In Q1’2022

By Soko Directory Team / Published June 20, 2022 | 10:58 am




KEY POINTS

Kenya still remains overbanked as the number of banks remains relatively high compared to the population. To bring the ratio to 5.5x, we need to reduce the number of banks from the current 38 banks to 30 banks.


Kenyan Shilling

KEY TAKEAWAYS


The listed banks’ management quality also improved, with the Cost to Income ratio improving by 10.4% points to 53.1%, from 63.5% recorded in Q1’2021, as banks continued to reduce their provisioning levels following the improvement business environment during the period.


The Core Earnings per Share (EPS) for the listed banks recorded a weighted growth of 37.9% in Q1’2022, from a weighted growth of 28.4% recorded in Q1’2021, mainly attributable to a 21.4% growth in non-funded income coupled with a 17.7% growth in net interest income.

Additionally, the Asset Quality for the listed banks improved in Q1’2022, with the gross NPL ratio declining by 1.0% point to 12.5%, from 13.5% in Q1’2021. Despite this improvement in the asset quality, the NPL ratio remains higher than the 10-year average of 8.1%.

The listed banks’ management quality also improved, with the Cost to Income ratio improving by 10.4% points to 53.1%, from 63.5% recorded in Q1’2021, as banks continued to reduce their provisioning levels following the improvement business environment during the period.

The themes that shaped the sector include:

Regulation of Digital Lenders

The Central Bank of Kenya (CBK) enacted the law to regulate digital lenders, granting the bank the authority to license and oversee previously unregulated digital credit providers.

The regulations were published on 18th March 2022 and allowed digital lenders a period of six months to acquire licenses from CBK. The regulations are aimed at protecting borrowers against the predatory practices of unregulated digital credit providers, particularly their high costs, unethical debt collection practices, and misuse of personal information.

“We expect the move to streamline the digital lending services sector and weed out unscrupulous digital lenders who have taken advantage of the unregulated space to violate various consumer rights and privacy,” said Cytonn.

Regional Expansion through Mergers and Acquisitions

Kenyan banks are looking at having an extensive regional reach. On 8th June 2022, Centum Investment Company PLC announced that it had entered into a binding agreement to sell its 83.4% shareholding in Sidian Bank to Access Bank PLC, for consideration of Kshs 4.3 bn subject to relevant approval from the Central bank of Kenya and the Competition Authority of Kenya.

The price consideration from Access Bank translates to a Price to Book Value (P/B) of 1.1x, which is lower than the 8-year acquisitions average P/B of 1.3x, but higher than the current average P/B of the listed banking stocks of 0.9x.

The acquisition valuations for banks have been recovering, with the valuations increasing from an average of 0.6x in 2020 to 1.3x in 2021. This however still remains low compared to historical prices paid as highlighted in the chart below;

The number of commercial banks in Kenya currently stands at 38, the same as in Q1’2022 but lower than the 43 licensed banks in FY’2015.

The ratio of the number of banks per 10 million population in Kenya now stands at 7.1x, which is a reduction from 9.0x in FY’2015 demonstrating continued consolidation of the banking sector.

However, despite the ratio improving, Kenya still remains overbanked as the number of banks remains relatively high compared to the population. To bring the ratio to 5.5x, we need to reduce the number of banks from the current 38 banks to 30 banks. For more on this see our topical.

Asset Quality

Asset quality for listed banks improved in Q1’2022, with the Gross NPL ratio declining by 1.0% points to 12.5%, from 13.5% in Q1’2021.

According to the May 2022 MPC Press Release, the NPL ratio for the entire banking sector stood at 14.1% as of April 2022, relatively unchanged from April 2021, with the majority of the non-performing loans stemming from sectors like the building and construction sector, manufacturing as well as the transport and communication sectors.

Notably, the NPL ratio increased from the 13.1% recorded in December 2022 signaling a deteriorating business environment occasioned by the increased cost of living.

“We expect credit risk to remain elevated in the short term given the resurgence of COVID-19 infections as well as persistent supply constraints which are expected to continue to weigh on the business environment,” added Cytonn.

The chart below highlights the asset quality trend for the listed banks:

The table below highlights the asset quality for the listed banking sector:

Capital Raising

In Q1’2022, listed banks continued to borrow from international institutions to not only strengthen their capital position but also boost their ability to lend to the perceived riskier Micro Small and Medium-Sized Enterprises (MSMEs) segment in order to support the small businesses in the tough operating environment occasioned by the COVID-19 pandemic.

In the period under review, Equity Group received USD 165.0 mn (Kshs 18.6 bn) facility from the International Finance Corporation (IFC) to Equity Bank Kenya in January 2022 in a bid to raise capital and for onward lending to climate-smart projects and Small and Medium Enterprises (SMEs) in Kenya.




About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system.Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

View other posts by Soko Directory Team


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