• CySuites Apartment Hotel was officially opened, with the Chief Guest being Kenya National Chamber of Commerce and Industry (KNCCI) President, Mr. Richard Ngatia. Take a look at the event note here
• Edwin H. Dande, Chief Executive Officer, Cytonn Investments was interviewed by Citizen Digital where he talked about the company stocks market. Read more here
• Shiv Arora, Chief Operating Officer, Cytonn Investments, released the Q3’2019 Investments Market Update at CySuites Apartment Hotel. Take a look at the event note here
• Beatrice Mwangi, Research Analyst, Cytonn Investments was on K24 TV to talk about the Kenyan real estate sector. Watch Beatrice here
• Cytonn Money Market Fund closed the week at an average yield of 10.6% p.a. To subscribe, just dial *809#;
• Phase 1 of The Alma is now 100% sold with early buyers having achieved up to 55% capital appreciation. We are now running a promotion in Phase 2: Buy a unit in Phase 2 with a 15-year payment plan and 0% deposit. For inquiries, please email us on clientservices@cytonn.com. The site is open between 8 am - 5 pm, 7-days a week for site visits;
• For an exclusive tour of Cytonn’s real estate developments, visit: Sharp Investor's Tour and for more information, email us at sales@cytonn.com;
• We continue to hold weekly workshops and site visits on how to build wealth through real estate investments. The weekly workshops and site visits target both investors looking to invest in real estate directly and those interested in high yield investment products to familiarize themselves with how we support our high yields. Watch progress videos and pictures of The Alma, Amara Ridge, and The Ridge;
• We continue to see very strong interest in our weekly Private Wealth Management Training (largely covering financial planning and structured products). The training is at no cost and is open only to pre-screened participants. We also continue to see institutions and investment groups interested in the training for their teams. Cytonn Foundation, under its financial literacy pillar, runs the Wealth Management Training. If interested in our Private Wealth Management Training for your employees or investment group, please get in touch with us through wmt@cytonn.com. To view the Wealth Management Training topics, click here;
• For recent news about the company, see our news section here;
• We have 10 investment-ready projects, offering attractive development and buyer targeted returns. See further details here: Summary of Investment-Ready Projects

Money Markets, T-Bills & T-Bonds Primary Auction:

During the month of November, T-bills remained undersubscribed, with the overall subscription rate coming in at 90.2%, compared to 84.5% recorded in the month of October 2019. The continued undersubscription has partly been attributed to investors holding back in anticipation of a potential increase in the risk premium for government securities following the repeal of the interest rate cap, which is expected to result in an increase in interest rates. This has seen the bond turnover declining by 2.2% to Kshs 35.0 bn in November from Kshs 35.8 bn in October.  The subscription rates for the 91-day and the 364–day came in at 78.3% and 152.1%, a decline from 79.4% and 155.5% recorded in October, respectively. The subscription rates for the 182-day T-bill however increased to 33.1%, from 15.6% recorded in October. The yields on the 91-day and 182-day T bills increased by 0.7% points and 1.0% points to 7.1% and 8.2%, from 6.4% and 7.2%, respectively. The yield on 364-day paper however remained unchanged at 9.8%. The Central Bank remained disciplined in rejecting expensive bids in order to ensure the stability of interest rates.

During the week, T-bills continued to be undersubscribed, with the subscription rate coming in at 34.8%, down from 56.2% the previous week.  The yield on the 91-day, 182-day, and 364-day papers remained unchanged at 7.1%, 8.2% and 9.8%, respectively. The acceptance rate dropped to 59.7%, from 88.4% recorded the previous week, with the government accepting Kshs 5.0 bn of the Kshs 8.4 bn bids received.

The 91-day T-bill is currently trading at a yield of 7.1%, which is below its 5-year average of 8.6%. The increasing yield on the 91-day paper is mainly attributable to the repeal of interest rate caps.

During the week, the National Treasury issued a Kshs 21.7 bn tap sale for FXD 4/2019/10, with a coupon rate of 12.3% for budgetary support, following the low reception in the initial issue, which was undersubscribed with the subscription rate coming in at 76.8%, which saw the Kenyan Government only managing to raise Kshs 28.4 bn, lower than Kshs 50.0 bn issued. The tap sale was undersubscribed, with the subscription rate coming in at 37.5%, on the back of an expected increase in private sector credit with banks now looking to lend to the private sector, due to the interest rate cap repeal. The acceptance rate on the bond was 100.0%, with the government accepting Kshs 8.1 bn of the Kshs 8.1 bn bids received.

In the money markets, 3-month bank placements ended the week at 8.4% (based on what we have been offered by various banks), the 91-day T-bill came in at 7.1%, while the average of Top 5 Money Market Funds came in at 9.9%, unchanged from the previous week. The Cytonn Money Market Fund closed the week at 10.6%, unchanged from the previous week.

Secondary Bond Market:

The yields on government securities in the secondary market remained relatively stable during the month of November, as the Central Bank of Kenya continued to reject expensive bids in the primary market. On an YTD basis, government securities on the secondary market have gained with yields declining across the board except for the 20-year and 23-year securities.

Liquidity:

Liquidity in the money markets improved during the month of November with the average interbank rate declining to 4.1%, from 7.0% recorded in October, supported by government open market activities such as selling the dollar to increase dollar liquidity, which offset tax payments. During the week, the average interbank rate increased to 4.7%, from 3.4% recorded the previous week, pointing to tightening of liquidity in the money markets attributed to the aggressive mobilization of revenue and cutting down by the government and cutting down on spending. The average interbank volumes rose by 31.7% to Kshs 23.8 bn, from Kshs 18.0 bn recorded the previous week.

Kenya Eurobonds:

According to Reuters, the yield on the 10-year Eurobond issued in June 2014 decreased by 0.1% points to 5.3% in November, from 5.4% in October 2019. During the week, the yield on the 10-year Eurobond remained stable at 5.3%, similar to the previous week.

During the month, the yields on the 10-year and 30-year Eurobond issued in February 2018 both increased by 0.2% points and 0.3% points to close at 6.6% from 6.4% in October and at 8.1% from 7.8% in October, respectively. During the week, the yield on the 10-year remained unchanged at 6.6% while the 30-year Eurobond, increased by 0.1% points to 8.1%, from 8.0% previously.

During the month, the yields on the newly issued dual-tranche Eurobond with 7-years remained unchanged at 6.2% from the previous month. The 12-year Eurobond however increased by 0.1% points to 7.3% from 7.2% recorded in October 2019. During the week, the yields on the 7-year Eurobond increased by 0.1% points to 6.2% from 6.1% the previous week, while the 12-year Eurobond decreased by 0.1% points to 7.3%, from 7.4% previously.

Kenya Shilling:

The Kenya Shilling appreciated by 0.4% against the US Dollar during the month of November to Kshs 102.8, from Kshs 103.2 at the end of October, supported by inflows from diaspora remittances and portfolio investors buying government debt. During the week, the Kenya Shilling depreciated by 1.4% against the dollar to close at Kshs 102.8, owing to a surge in end month dollar demand from merchant importers and the energy sector. On a YTD basis, the shilling has depreciated by 0.9% against the dollar, in comparison to the 1.3% appreciation in 2018. In our view, the shilling should remain relatively stable against the dollar in the short term, supported by:

1. The narrowing of the current account deficit, with preliminary data indicating that Kenya’s current account deficit improved by 11.8% during Q2’2019, coming in at a deficit of Kshs 107.6 bn, from Kshs 122.0 bn in Q2’2018, equivalent to 6.2% of GDP, from 7.6% recorded in Q2’2018. This was mainly driven by the narrowing of the country’s merchandise trade deficit by 1.7% and a rise in secondary income (transfers) balance by 5.1%,
2. Improving diaspora remittances, which have increased cumulatively by 7.0% in the 12-months to October 2019 to USD 2.8 bn, from USD 2.6 bn recorded in a similar period of review in 2018. The rise is due to:
1. Increased uptake of financial products by the diaspora due to financial services firms, particularly banks, targeting the diaspora, and,
2. New partnerships between international money remittance providers and local commercial banks making the process more convenient,
3. Foreign capital inflows, with investors looking to participate in the equities market,
4. CBK’s supportive activities in the money market, such as repurchase agreements and selling of dollars, and,
5. High levels of forex reserves, currently at USD 8.7 bn (equivalent to 5.4-months of import cover), above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover.

Inflation:

The y/y inflation for the month of November increased to 5.6%, from 4.95% recorded in October, which exceeded our projections of an increase to 5.2% - 5.4% with the variance mainly due to the 0.6% rise in the food and non-alcoholic drinks’ index, which exceeded our expectations of a 0.2% rise. Month-on-month inflation also increased by 0.4%, which was attributable to:

1. A 0.6% increase in the food and non-alcoholic drinks’ index, due to an increase in prices of significant food items including maize flour-sifted and tomatoes, which increased by 4.3% and 6.1%, respectively,
2. A 0.3% increase in the housing, water, electricity, gas and other fuels index, as a result of an increase in prices of some cooking fuels such as kerosene, which increased by 2.5%, and,
3. A 0.3% increase in the transport index on account of the increase in
   pump prices of diesel and petrol by 2.2% and 2.0%, respectively.

 Going forward, we expect the inflation rate to remain within the government set range of 2.5% - 7.5%.

Monthly Highlights:

The Monetary Policy Committee (MPC) met on 25^th November 2019 to review the prevailing macroeconomic conditions and decide on the direction of the Central Bank Rate (CBR). The MPC lowered the Central Bank Rate (CBR) by 50 bps to 8.5% from 9.0%, in line with our expectations, citing that inflation expectations remained well anchored within the target range and that the economy was operating below its potential level, as evidenced by:

1. Month on month inflation remained within the 2.5% - 7.5% target range, largely driven by stable food prices and lower cost of energy. Inflation stood at 4.9% in October an increase from 3.8% recorded in September, due to temporary effects of increase in prices of maize grain,
2. Stability in the foreign exchange market supported by the narrowing of the current account deficit to 4.1% of GDP in the 12-months to September 2019, from 5.1% in September 2018, driven by strong receipts from transport and tourism services, resilient diaspora remittances and lower imports of food and SGR related equipment. The foreign exchange market has also been supported by adequate forex reserves currently at USD 8.8 bn (equivalent to 5.5-months of import cover), that continue to provide adequate cover and a buffer against short-term shocks in the foreign exchange market, and,
3. Improving private sector credit growth, despite being below historical averages, coming in at 6.6% in the 12-months to October. Strong growth in credit to the private sector was being observed in the consumer durables (28.6%), private households (6.9%) and trade (8.5%).

As such, the MPC concluded that due to the tightening of fiscal policy, there was room for accommodative monetary policy to support economic activity. The committee also pointed out that there was a need to remain vigilant on possible effects of the increased uncertainties in the external environment. In the short and medium-term, we expect the Central Bank Rate to remain stable.

During the week, rating agency Moody’s released its rankings. In the rankings Moody’s maintained Kenya’s sovereign credit rating at B2 and described the outlook as stable reflecting its expectations of a relatively strong economic growth, neutralized by large fiscal deficits and debt. Kenya’s rank was maintained at B2, owing to the high levels of public debt driven by high fiscal deficits, as well as weak institutions.

According to Moody’s Kenya’s debt to GDP ratio increased to 62.0% at the end of 2019 from 49.0% in 2015. The institution however, noted that Kenya has a diversified economy with multiple growth sources, favorable prospects and resilience to shocks. The agency also noted the deep capital markets and a mature financial services sector relative to regional peers as some of the strengths. Factoring the current debt levels and the risks abound in the medium term, we are of the view that in order to reduce our debt levels, in line with the IMF sustainable levels of 50.0%, the government should consider achieving:

1. Enhanced tax revenue collection growth,
2. Involve the private sector in development through Public-Private Partnerships (PPP’s),
3. Continue with the fiscal consolidation efforts aimed at reducing recurrent expenditure and improve on development budget absorption rates,
4. Enhancing the capacity of the Public Debt Management Office and ensure the implementation of the Medium-Term Debt Management Strategies as outlined every financial year, and
5. Ensure an enabling environment that promotes Macro-economic stability as it is a critical component for debt sustainability.

For more information see our debt sustainability note (here)

Rates in the fixed income market have remained relatively stable as the government rejects expensive bids. The government is 5.9% behind its domestic borrowing target, having borrowed Kshs 119.5 bn against a pro-rated target of Kshs 127.1 bn. We expect an improvement in private sector credit growth considering the repeal of the interest rate cap. This will result in increased competition for bank funds from both the private and public sectors, resulting in upward pressure on interest rates. Owing to this, our view is that investors should be biased towards short-term fixed-income securities to reduce duration risk.

Markets Performance

During the month of November, the equities market was on a downward trend, with NASI, NSE 20 and NSE 25 decreasing by 1.0%, 1.0%, and 0.2%, respectively. The decline was driven by losses in large-cap bank stocks such as NCBA Group, Barclays Bank of Kenya, Standard Chartered Bank of Kenya and KCB Group, which recorded losses of 10.7%, 6.4%, 5.8% and 3.4%, respectively, owing to the market re-adjusting after the bullish trend in October owing to expectations of the repeal of the interest rate cap. During the week, the market was on an upward trend, with NASI and NSE 25 both increasing by 2.0%, whereas NSE 20 declined slightly by 0.005%, taking their YTD performance to gains/ (losses) of 12.5%, 10.3%, and (7.6%) for NASI, NSE 25 and NSE 20, respectively.

Equities turnover increased by 5.1% during the month to USD 165.8 mn, from USD 157.8 mn in October 2019. Foreign investors remained net sellers for the month, with a net selling position of USD 4.7 mn, compared to October’s net selling position of USD 14.8 mn. During the week, equities turnover increased by 29.6% to USD 32.2 mn, from USD 24.9 mn the previous week, bringing the year to date (YTD) turnover to USD 1,383.9 mn. Foreign investors became net buyers for the week, with a net buying position of USD 0.7 mn, from last week’s net selling position of USD 1.4 mn.

The market is currently trading at a price to earnings ratio (P/E) of 12.0x, 9.9% below the historical average of 13.3x, and a dividend yield of 6.0%, 2.1% points above the historical average of 3.9%. With the market trading at valuations below the historical average, we believe there is value in the market. The current P/E valuation of 12.0x is 23.5% above the most recent trough valuation of 9.7x experienced in the first week of February 2017, and 44.3% above the previous trough valuation of 8.3x experienced in December 2011. The charts below indicate the historical P/E and dividend yield of the market.

Weekly Highlights

During the week, Moody’s Investors released a peer comparison report rating some of Kenya’s and Nigeria’s biggest banks. Particularly, they compared Kenya’s Equity Bank limited, Co-operative Bank of Kenya Limited and KCB Bank Kenya Limited with Nigeria’s Access Bank Plc, Zenith Bank Plc and United Bank of Africa Plc. Their findings showed Kenyan banks to be superior in profitability compared to the Nigerian banks. Some of the metrics used included;

• Cost to Income - Kenyan banks have lower cost to income ratios despite their higher retail overhead costs,
• Net Interest Margin - Kenyan banks have higher net interest margins owing to the greater exposure to retail clients, whereas, Nigerian banks have lower net interest margins which are attributable to their focus on lower margin corporate clients, and,
• Cost of Funds - Kenyan banks cost of funding was 100 bps lower owing to their wider access to retail deposits.

Moody’s outlook for the banks was positive with an expectation that;

• Kenyan banks will have higher net interest margins going forward supported by the recent interest rate cap repeal,
• Kenyan banks overall profitability will increase owing to stronger cost to income ratios mostly associated with lower loan loss provision costs,
• Nigerian banks will increase their net interest margins as they target to increase exposure to retail clients, and,
• Nigerian banks will improve their cost to income ratios owing to digitization of their operations and the limit in branch and staff expansion.

Therefore, Kenyan banks can be expected to benefit from the recent interest rate cap removal leading to increased profitability and much lower cost to income ratios.

Monthly Highlights

During the month, Equity Bank Group (‘Equity’), in line with its regional expansion strategy, announced that it is set to pay Kshs 10.7 bn to acquire a 66.5% stake in Banque Commerciale du Congo (BCDC), a top bank in the Democratic Republic of Congo owned by the George Arthur Forrest family. Equity is expected to acquire 625,354 shares in a deal that is inclusive of dividends that the bank will declare early next year.

For more information, see our Equities Highlight #47

Earnings Releases

During the week, I&M Holdings released their Q3’2019 financial results

Income Statement:

• I&M Holdings released their Q3’2019 results, registering core earnings per share growth of 13.4% to Kshs 16.0, from Kshs 14.2 in Q3’2018. Performance was driven by a 6.8% increase in operating income to Kshs 16.9 bn, from Kshs 15.8 bn in Q3’2018, which outpaced the marginal increase in operating expenses by 0.5% to Kshs 8.23 bn from Kshs 8.18 bn recorded in Q3’2018,
• Total operating income increased by 6.8% to Kshs 16.9 bn, from Kshs 15.8 bn in Q3’2018. This was due to a 14.0% increase in Non-Funded Income (NFI) to Kshs 6.3 bn, from Kshs 5.6 bn in Q3’2018, coupled with a 2.9% growth in Net Interest Income (NII) to Kshs 10.6 bn, from Kshs 10.3 bn recorded in Q3’2018,
• Interest income increased by 7.2% to Kshs 19.2 bn, from Kshs 17.9 bn in Q3’2018. This was mainly driven by the 13.5% increase in interest income on loans and advances to Kshs 15.5 bn, from Kshs 13.7 bn in Q3’2018. The growth was however mitigated by the 21.2% decline in interest income on government securities to Kshs 3.1 bn in Q3’2019, from Kshs 4.0 bn. The yields on interest earning assets stood at 10.1% in Q3’2019, a decline from 10.9% recorded in Q3’2018, due to a 17.2% increase in average interest earning assets to Kshs 269.5 bn from Kshs 230.0 bn, which outpaced the 7.2% increase in interest income,
• Interest expense increased by 12.9% to Kshs 8.6 bn from Kshs 7.6 bn in Q3’2018, as interest expense on customer deposits increased by 21.3% to Kshs 7.8 bn from Kshs 6.4 bn in Q3’2018. Interest expense on deposits from other banking institutions however declined by 65.5% to Kshs 161.0 mn from Kshs 467.2 mn in Q3’2018. The cost of funds decreased marginally to 4.6% from 4.8% in Q3’2018, driven by a 27.3% increase in interest bearing liabilities to Kshs 239.2 bn from Kshs 176.3 bn which grew faster than interest expense which grew by 12.9%,
• Non-Funded Income increased by 14.0% to Kshs 6.3 bn from Kshs 5.6 bn in Q3’2018. The increase in NFI was driven by a 111.8% increase in other income to Kshs 1.2 bn from Kshs 558.8 mn in Q3’2018 coupled with an 11.1% increase in fees and commission income on loans to Kshs 1.4 bn from Kshs 1.2 bn in Q3’2018. Other fees and commissions increased by 1.1% to Kshs 1.9 bn from Kshs 1.8 bn in Q3’2018. The revenue mix shifted to 63:37 funded to non-funded income from 65:35 in Q3’2018, owing to the faster increase in NFI compared to NII,
• Total operating expenses posted a marginal growth of 0.5% to Kshs 8.23 bn from Kshs 8.18 bn, largely driven by a 13.6% increase in staff costs to Kshs 3.5 bn in Q3’2019 from Kshs 3.1 bn in Q3’2018, coupled with a 31.6% decline in Loan loss provisions (LLP) to Kshs 1.3 bn in Q3’2019 from Kshs 1.9 bn in Q3’2018,
• The cost to income ratio improved by 3.1% points to 48.6% from 51.7% in Q3’2018, driven by the faster increase of operating income compared to operating expenses. Without LLP, however, the cost to income ratio deteriorated to 40.9% from 39.9% in Q3’2018,
• Profit before tax recorded a 12.2% growth to Kshs 9.3 bn from Kshs 8.3 bn in Q3’2018. Profit after tax increased by 13.4% Kshs 6.3 bn in Q3’2019 from Kshs 5.5 bn recorded in a similar period in 2018, with the effective tax rate declining to 28.7% from 29.4%.

 Balance Sheet:

• The balance sheet recorded an expansion with total assets growth of 12.0% to Kshs 324.3 bn, from Kshs 289.6 bn recorded in Q3’2018. This growth was driven by a 6.6% increase in net loans and advances to Kshs 174.1 bn in Q3’2019, from Kshs 163.3 bn in Q3’2018, and a 9.2% growth in deposits and balances due from banking institutions abroad to Kshs 52.0 bn from Kshs 33.1 bn in Q3’2018. Government securities decreased by 0.7% to Kshs 53.5 bn from Kshs 53.9 bn in Q3’2018,
• Total liabilities recorded a growth of 11.2% to Kshs 266.7 bn from Kshs 239.8 bn recorded in Q3’2018, driven by a 13.0% increase in customer deposits to Kshs 236.2 bn from Kshs 209.0 bn in Q3’2018. Deposits per branch increased by 13.0% to Kshs 5.6 bn from Kshs 5.0 bn in Q3’2018 as the bank has not increased its branch network from the current 42 branches,
• The loan to deposit ratio decreased to 73.7% from 78.1% in Q3’2018, driven by the 13.0% growth in deposits to Kshs 236.2 bn from Kshs 209.0 bn in Q3’2018, which outpaced the 6.6% increase in net loans to Kshs 174.1 from Kshs 163.3 bn in Q3’2018,
• Gross non-performing loans increased by 8.9% to Kshs 24.1 bn in Q3’2019 from Kshs 22.1 bn in Q3’2018. However, the NPL ratio remained unchanged at 12.7% in Q3’2019. General loan loss provisions increased by 40.3% to Kshs 8.3 bn from Kshs 5.9 bn in Q3’2018, hence an improvement in NPL coverage to 62.5% in Q3’2019 from 49.2% in Q3’2018,
• Shareholders’ funds increased by 16.0% to Kshs 54.5 bn from Kshs 47.0 bn recorded in Q3’2018 attributable to a 19.2% increase in retained earnings to Kshs 31.7 bn from Kshs 26.6 bn,
• I&M Holdings is currently sufficiently capitalized with a core capital to risk weighted assets ratio of 15.9%, 5.4% above the statutory requirement. In addition, the total capital to risk weighted assets ratio was 19.4%, exceeding the statutory requirement by 4.9%. Adjusting for IFRS 9, the core capital to risk weighted assets stood at 16.0%, while total capital to risk weighted assets came in at 19.5%, indicating that the bank’s total capital relative to its risk-weighted assets decreased by 0.1% due to the impact of IFRS 9,
• I&M Holdings currently has a return on average assets of 2.8% and a return on average equity of 17.2%.

Key Take-Outs:

1. The bank maintained its continual rise in NFI recording a 14.0% growth to Kshs 6.3 bn from Kshs 5.6 bn in Q3’2018. This resulted in the revenue contribution mix shifting to 63:37 funded to non-funded income, from 65:35, owing to the high growth in NFI that outpaced growth in NII. The acquisition of Youjays Insurance Brokers in 2018 provides the bank with an avenue to grow its bancassurance business, thereby putting the firm’s NFI on a positive growth trajectory, and,
2. The bank’s asset quality remained steady, with the NPL ratio flat-lining at 12.7% while NPL coverage improved to 62.5% in Q3’2019 from 49.2% in Q3’2018. Further, the 40.3% rise in general provisions to Kshs 8.3 bn from Kshs 5.9 bn in Q3’2018, outpaced the 8.9% growth in gross NPL to Kshs 24.1 bn in Q3’2019 from Kshs 22.1 bn in Q3’2018 thus leading to an improvement in the NPL coverage to 62.5% from 49.2% in Q3’2018.

Going forward, the factors that would drive the bank’s growth would be:

1. Non-Funded Income Growth Initiatives – I&M Holdings’ NFI growth is improving as the bank focuses on digital innovation to augment transaction volumes and increase fee income. The bank needs to increase capacity of its brokerage and advisory businesses so as to increase income contribution from investment and advisory services, and,
2. Diversification – The bank has been aggressively expanding into other regions, namely Tanzania, Rwanda and Uganda. This is expected to drive growth in the near future.

For more analysis, see the I&M Holdings Q3’2019 Earnings Note

During the week, Stanbic Bank released their Q3’2019 financial results

Income Statement:

• Profit after tax increased by 7.9% to Kshs 5.1 bn in Q3’2019, from Kshs 4.7 bn in Q3’2018. The performance was driven by a 15.2% increase in total operating income,
• Total operating income increased by 15.2% to Kshs 18.4 bn, from Kshs 15.9 bn in Q3’2018, driven by a 12.6% increase in Net Interest Income to Kshs 9.6 bn in Q3’2019, from Kshs 8.5 bn in Q3' 2018, coupled with a 18.3% increase in Non-Funded Income to Kshs 8.8 bn, from Kshs 7.4 bn in Q3’2018,
• Interest income increased by 11.3% to Kshs 15.4 bn in Q3’2019, from Kshs 13.8 bn in Q3’2018. This was largely due to the interest income on loans and advances, which increased by 13.6% to Kshs 11.7 bn in Q3’2019, from Kshs 10.3 bn in Q3’2018. The yield on interest-earning assets increased to 8.1% from 6.7% in Q3’2018 following the 11.6 % increase in interest income to Kshs 15.4 bn from Kshs 13.8 bn in Q3’2018,
•  Interest expense increased by 9.3% to Kshs 5.8 bn from Kshs 5.3 bn in Q3’2018, following a 19.7% increase in the interest expense on customer deposits to Kshs 4.0 bn from Kshs 3.3 bn in Q3’2018. The increase was however mitigated by the 20.8% decline in Interest expense on deposits and placements from banking institutions, to Kshs 1.2 bn from Kshs 1.5 bn in Q3’2018. The cost of funds thus rose to 2.6%, from 2.5% in Q3’2018. Net Interest Margin increased to 6.9%, from 6.2% in Q3’2018 on the back of the rapidly increasing Net Interest Income by 55.3% to Kshs 13.2 bn from Kshs 8.5 bn in Q3’ 2018,
• Non-Funded Income (NFI) increased by 18.3% to Kshs 8.8 bn in Q3’2019 from Kshs 7.4 bn in Q3’2018. The growth in NFI was driven by a 44.6% increase in foreign exchange trading income to Kshs 3.4 bn from Kshs 2.3 bn in Q3’2018, and a 22.6% increase in other fees and commissions to Kshs 3.4 bn from Kshs 2.8 bn. Fees and commissions on loans and advances increased by 30.9% to Kshs 0.3 bn from Kshs 0.2 bn in Q3’2019. The current revenue mix stands at 52:48 funded to non-funded income in Q3’2018 from the 53:47 ratio recorded in Q3’2018, owing to a faster increase in NFI,
• Total operating expenses increased by 26.3% to Kshs 11.7 bn in Q3’2019 from Kshs 9.2 bn in Q3’2018, largely driven by a 31.2% increase in the loan loss provision to Kshs 1.7 bn from Kshs 1.2 bn in Q3’2018. Staff costs also recorded a 0.1% increase to Kshs 4.3 bn from Kshs 4.2 bn in Q3’2018. Consequentially, Cost to income ratio with LLP deteriorated to 63.5% in Q3’2019 from 57.9% in Q3’2018. Without LLP, the Cost to income ratio also deteriorated to 54.4% in Q3’2019, from 50.1% in Q3’2018,
• Profit before tax remained unchanged at Kshs 6.7 bn in Q3’2019. Profit after tax increased by 24.0% to Kshs 5.9 bn in Q3’2019 from Kshs 4.7 bn in Q3’2018 after adding back the exceptional items.

Balance Sheet:

• The balance sheet recorded an expansion as total assets increased by 2.8% to Kshs 294.3 bn from Kshs 286.3 bn in Q3’2018. This growth was largely driven by a 14.6% increase in the loan book to Kshs 161.7 bn from Kshs 141.1 bn, and balances due from the Central Bank, which increased by 88.0% to stand at Kshs 36.0 bn from Kshs 19.2 bn in Q3’2018. The growth was however slowed down by a sharp decline in placements by 51.6% % to Kshs 4.5 bn from Kshs 6.8 bn in Q3’2018,
•  Total liabilities rose by 1.3% to Kshs 256.5 bn from Kshs 253.2 bn in Q3’2018, largely driven by a 5.4% increase in customer deposits to Kshs 191.2 bn in Q3’2019 from Kshs 181.5 bn in Q3’ 2018, and borrowings that grew by 0.8% to Kshs 12.4 bn from Kshs 12.3 bn in Q3’2018. Other liabilities however decreased by 17.4% to Kshs 10.8 bn in Q3’2019 from Kshs 13.1 bn in Q3’2018,
•  The faster increase in loans as compared to the deposits lead to the increase in the loan to deposit ratio to 84.6% in Q3’2019 from 77.8% in Q3’2018,
•  Gross non-performing loans increased by 78.3% to Kshs 18.9 bn from Kshs 10.6 bn in Q3’2018. The NPL ratio thus increased to 10.9% in Q3’2019 from 7.5% in Q3’2018, owing to the faster growth in non-performing loans that outpaced growth in the net loans. General Loan Loss Provisions (LLPs) increased by 73.6% to Kshs 6.8 bn from Kshs 3.9 bn in Q3’2018. The NPL coverage declined to 58.9% in Q3’2019 from 60.6% in Q3’2018 mainly due to the 78.3% growth in Non-performing loans to Kshs 18.9 bn from Kshs 10.6 bn in Q3’2018 which outpaced the growth in loan loss provision,
• Shareholders’ funds increased by 2.8% to Kshs 37.8 bn in Q3’2019 from Kshs 33.1 bn in Q3’2018, largely due to the 17.3% increase in the retained earnings to Kshs 30.8 bn from Kshs 26.3 bn in Q3’2018,
• Stanbic Bank is currently sufficiently capitalized with a core capital to risk weighted assets ratio of 13.9%, 3.4% points above the statutory requirement. In addition, the total capital to risk weighted assets ratio was 17.2%, exceeding the statutory requirement by 2.7% points. Adjusting for IFRS 9, core capital to risk weighted assets ratio was at 15.1% while total capital to risk weighted assets was 18.7%, indicating that the bank’s total capital relative to its risk-weighted assets declined by 1.5% points due to the implementation of IFRS 9,
• Stanbic Holdings currently has a return on average assets of 2.5% and a return on average equity of 20.7%.

Key Take-Out:

The bank recorded a relatively strong performance in both funded and NFI segments. The bank’s aggressive lending has led to increased interest income, as well as the associated fees and commissions. The increased lending has however came at a cost as asset quality deteriorated, as shown by the rise in the NPL ratio to 10.9%, from 7.5% in Q3’2018. Consequently, the cost of risk rose to 9.1% from 7.8% in Q3’2018.

For more analysis, see the Stanbic Bank Q3’2019 Earnings Note

During the week, HF Group released their Q3’2019 financial results

Income Statement

• HF Group released their Q3’2019 financial results, recording a 74.5% decline in loss per share to Kshs 0.2 in Q3’2019, from a loss per share of Kshs 0.9 recorded in Q3’2018. The performance was driven by a 16.5% increase in total operating income, which was offset by a 5.6% increase in total operating expenses,
• Total operating income increased by 16.5% to Kshs 2.8 bn, from Kshs 2.4 bn in Q3’2018. This was mainly driven by a 78.9% increase in Non-Funded Income (NFI) to Kshs 1.1 bn, from Kshs 0.6 bn in Q3’2018. This was however weighed down by a 4.3% decline in Net Interest Income (NII) to Kshs 1.7 bn from Kshs 1.8 bn in Q3’2018,
• Interest income declined by 11.9% to Kshs 4.1 bn, from Kshs 4.7 bn in Q3’2018. This was driven by a 13.9% decline in interest income from loans and advances to Kshs 3.8 bn, from Kshs 4.4 bn in Q3’2018. Interest income on government securities, however, recorded a 31.5% rise to Kshs 0.3 bn, from Kshs 0.2 bn in Q3’2018. The yield on interest-earning assets declined to 11.3%, from 11.8% in Q3’2018, due to the faster 11.9% decline in interest income compared to the 11.5% decline in the average interest-earning assets. Consequently, the Net Interest Margin (NIM) declined to 4.5%, from 4.8% in Q3’2018,
• Interest expense declined by 16.6% to Kshs 2.4 bn, from Kshs 2.9 bn in Q3’2018, following a 42.3% decline in interest on other interest expenses to Kshs 0.7 bn, from Kshs 1.1 bn in Q3’2018. Despite the decline, the cost of funds remained flat at 7.0%,
• Non-Funded Income increased by 78.9% to Kshs 1.1 bn, from Kshs 0.6 bn in Q3’2018. The increase was mainly due to a 144.2% increase in other fees & commissions to Kshs 0.3 bn, from Kshs 0.1 bn, coupled with a 68.5% increase in fees and commissions on loans and advances to Kshs 46.6 mn from Kshs 27.7 mn, and a further 68.6% increase in other income from Kshs 0.4 bn in Q3’2018 to Kshs 0.7 bn in Q3’2019. The revenue mix shifted to 62:38 funded to non-funded income, from 75:25, owing to the decline in NII coupled with the growth in NFI,
• Total operating expenses increased by 5.6% to Kshs 2.9 bn from Kshs 2.7 bn in Q3’2018, largely driven by a 64.5% increase in loan loss provisions to Kshs 0.6 bn from Kshs 0.4 bn in Q3’2018. This was however offset by a 17.2% decline in Staff costs to Kshs 0.7 bn from Kshs 0.9 bn, in Q3’2018,
• The Cost to Income Ratio (CIR) improved to 102.9%, from 113.5% in Q3’2018. Without LLP, the cost to income ratio improved, to 81.8% from 98.6% in Q3’2018, and,
• HF Group recorded a 75.0% decline in loss before tax to Kshs 81.4 mn from a loss before tax of Kshs 325.6 mn in Q3’2018. The Group also recorded a 74.5% decline in loss after tax of Kshs 84.6 mn from a loss after tax of Kshs 332.0 mn in Q3’2018.

Balance Sheet 

• The balance sheet recorded a contraction as total assets declined by 9.4% to Kshs 57.4 bn, from Kshs 63.4 bn in Q3’2018. The contraction was mainly driven by a 13.7% decline in the loan book to Kshs 39.2 bn from Kshs 45.4 bn in Q3’2018, coupled with a 41.6% decline in property & equipment to Kshs 1.2 bn from Kshs 2.1 bn recorded in Q3’2018,
• Government securities recorded a 7.0% decline to Kshs 3.6 bn, from Kshs 3.9 bn in Q3’2018,
• Total liabilities declined by 10.6% to Kshs 47.0 bn, from Kshs 52.6 bn in Q3’2018, driven by a 35.3% decline in borrowings to Kshs 9.9 bn, from Kshs 15.3 bn in Q3’2018. Customer deposits declined marginally by 0.1% to Kshs 34.6 bn from Kshs 34.7 bn in Q3’2018. Deposits per branch remained flat at Kshs 1.6 bn,
• The faster decline in loans as compared to deposits led to a decline in the loan to deposit ratio to 113.3% from 131.1% in Q3’2018,
• Gross Non-Performing Loans (NPLs) increased by 41.4% to Kshs 12.6 bn in Q3’2019 from Kshs 8.9 bn in Q3’2018. The NPL ratio thus deteriorated to 28.2%, from 18.2% in Q3’2018. General Loan Loss Provisions increased by 17.1% to Kshs 2.7 bn, from Kshs 2.3 bn in Q3’2018. Consequently, NPL coverage increased to 44.4%, from 42.4% in Q3’2018,
• Shareholders’ funds declined by 3.4% to Kshs 10.4 bn in Q3’2019, from Kshs 10.8 bn in Q3’2018,
• HF Group remains sufficiently capitalized with a core capital to risk-weighted assets ratio of 15.1%, 4.6% points above the statutory requirement of 10.5%. In addition, the total capital to risk-weighted assets ratio came in at 16.4%, exceeding the statutory requirement by 1.9% points. Adjusting for IFRS 9, the core capital to risk-weighted assets stood at 14.4%, while total capital to risk-weighted assets came in at 15.7% indicating that the bank’s total capital relative to its risk-weighted assets decreased by 0.7% due to the impact of IFRS 9, and,
• The bank currently has a Return on Average Assets (ROaA) of (0.6%), and a Return on Average Equity (ROaE) of (3.3%).

Key Take-Outs: 

1. The balance sheet declined by 9.4% to Kshs 57.4 bn, from Kshs 63.4 bn in Q3’2018. The contraction was mainly driven by a 13.7% decline in the loan book to Kshs 39.2 bn from Kshs 45.4 bn in Q3’2018, coupled with a 41.6% decline in Property & equipment to Kshs 1.2 bn from Kshs 2.1 bn recorded in Q3’2018. The bank faces issues of asset-liability mismatch - with a high cost of funds and declining average interest-earning assets,
2. The bank experienced a deterioration in asset quality as gross non-performing loans (NPLs) increased by 41.4% to Kshs 12.6 bn in Q3’2019, from Kshs 8.9 bn in Q3’2018. This warranted increased provisioning by 17.1% to Kshs 2.7 bn, from Kshs 2.3 bn in Q3’2018. The deteriorating asset quality, coupled with the tough operating environment occasioned by the interest rate cap, has continued to hamper the bank’s lending activities, leading to a decline in its interest income,

Going forward, the factors that would drive the bank’s growth would be: 

1. Continued investment in digital channels to enhance accessibility as well as reduce operating expenses mainly through aligning staff costs to the bank’s operational needs: On this end, the Bank undertook a redundancy exercise in 2018 in a cost-cutting drive, which saw the merging of some staff positions. This is expected to improve efficiencies in subsequent periods by providing clarity on operational accountabilities and curb the high operational costs, and,
2. We maintain our view that HF Group as a conventional bank has a long way to go, given its inability to mobilize deposits evidenced by the slow deposit growth. Furthermore, the removal of the Interest rate cap will ultimately increase competition among banks in terms of credit offerings. The bank will ultimately have to adjust its business model, or couple up with a strong bank with a sizeable asset base, and a strong deposit gathering capability, in an effort to capitalize on HF’s strength in mortgages and real estate development.

For more analysis, see the HF Q3’2019 Earnings Note

During the week, Diamond Trust Bank Kenya Ltd released their Q3’2019 financial results

Income Statement:

Diamond Trust Bank released its Q3’2019 results during the week, with core earnings per share growing by 7.5% to Kshs 20.2 from Kshs 18.8 in Q3’2018, lower than our expectation of a 13.3% increase to Kshs 21.3. Performance was driven by cost-cutting measures and efficiency evidenced by a 12.5% decrease in total operating expenses to Kshs 9.5 bn from Kshs 10.8 bn, which outpaced the decline in total operating that fell by 4.6% to Kshs 18.2 bn from Kshs 19.0 bn. The variance in core earnings per share growth relative to our expectations, was as a result of a faster growth in Non-Funded Income (NFI) of 5.7% to Kshs 4.37 bn, from Kshs 4.1 bn in Q3’2018 against our expectation of a 6.2% increase to Kshs 4.39 bn. Highlights of the performance from Q3’2018 to Q3’2019 include:

• Total operating income decreased by 4.6% to Kshs 18.2 bn, from Kshs 19.0 bn in Q3’2018. This was due to a 7.5% decrease in Net Interest Income (NII) to Kshs 13.8 bn from Kshs 14.9 bn in Q3’2018, that outpaced the 5.7% growth in Non-Funded Income (NFI) to Kshs 4.4 bn, from Kshs 4.1 bn in Q3’2018,
• Interest income decreased by 7.3% to Kshs 24.5 bn from Kshs 26.5 bn in Q3’2018. The interest income on loans and advances decreased by 10.2% to Kshs 14.8 bn from Kshs 16.5 bn in Q3’2018. Interest income on government securities decreased by 3.9% to Kshs 9.3 bn in Q3’2019, from Kshs 9.7 bn in Q3’2018. The yield on interest earning assets declined to 9.9% in Q3’2019, from 10.8% in Q3’2018, due to the decline recorded in total interest earning assets by 2.3%, to Kshs 333.8 bn from Kshs 341.7 coupled with the decline in interest income sustained from a low interest rate environment,
• Interest expense decreased by 7.0% to Kshs 10.7 bn from Kshs 11.6 bn in Q3’2018, as interest expense on customer deposits decreased by 10.7% to Kshs 9.2 bn, from Kshs 10.3 bn in Q3’2018. Other interest expense increased by 54.9% to Kshs 1.0 bn, from Kshs 664.4 mn in Q3’2018. Consequently, cost of funds decreased to 4.6%, from 4.9% in Q3’2018 due to the decline recorded in total interest bearing liabilities by 4.4% to Kshs 309.9 bn from Kshs 324.7 bn recorded in Q3’2018. The Net Interest Margin, resultantly, declined to 5.6%, from 6.1% in Q3’2018,
• Non-Funded Income increased by 5.7% to Kshs 4.4 bn, from Kshs 4.1 bn in Q3’2018. The increase in NFI was driven by a 41.2% increase in forex trading income to Kshs 1.4 bn from Kshs 1.2 bn in Q3’2018, coupled with a 25.1% increase in other income to Kshs 0.44 bn from Kshs 0.35 bn in Q3’2018. Fees and commissions on loans however decreased by 4.6% to Kshs 0.96 bn from Kshs 1.0 bn in Q3’2018, while other fees fell marginally by 1.2% to Kshs 1.57 bn from Kshs 1.58 bn in Q3’2018. The revenue mix shifted to 76:24 funded to non-funded income in Q3’2019, from 78:22 in Q3’2018, owing to the increase in NFI coupled with the decrease in NII,
• Total operating expenses decreased by 12.5% to Kshs 9.5 bn from Kshs 10.8 bn, largely driven by a 63.7% decrease in loan loss provision (LLP) to Kshs 870.3 mn in Q3’2019, from Kshs 2.4 bn in Q3’2018. The decline was however mitigated by the 8.5% increase in staff costs to Kshs 3.4 bn in Q3’2019, from Kshs 3.1 bn in Q3’2018,
• Due to the faster 12.5% decline in total operating expenses that outpaced the 4.6% decline in total operating income, the cost to income ratio improved to 52.2%, from 56.9% in Q3’2018. Without LLP, however, the cost to income ratio deteriorated to 47.4% from 44.4% in Q3’2018,
• Profit before tax increased by 5.8% to Kshs 8.7 bn, up from Kshs 8.2 bn in Q3’2018. Profit after tax increased by 6.5% to Kshs 6.0 bn in Q3’2019, from Kshs 5.6 bn in Q3’2018, as the effective tax rate declined to 31.0%, from 31.3% in Q3’2018.

Balance Sheet:

• The balance sheet recorded a contraction as total assets declined by 0.6% to Kshs 382.5 bn from Kshs 385.0 bn in Q3’2018. This decrease was largely driven by a 1.2% decrease in government securities to Kshs 97.5 bn in Q3’2019, from Kshs 98.7 bn in Q3’2018, coupled with a 2.9% contraction of the loan book to Kshs 192.0 bn in Q3’2019, from Kshs 197.7 bn in Q3’2018. The decline was however mitigated by the 55.8% growth in other assets to Kshs 14.4 bn, from Kshs 9.3 bn in Q3’2018,
• Total liabilities declined by 3.1% to Kshs 317.8 bn, from Kshs 328.0 bn in Q3’2018, driven by a 47.1% decrease in placements to Kshs 14.3 bn, from Kshs 27.0 bn in Q3’2018, coupled with a 15.8% decrease in borrowings to Kshs 12.6 bn, from Kshs 14.9 bn in Q3’2018,
• Deposits however increased by 0.3% to Kshs 283.1 bn from Kshs 282.2 in Q3’2018. Deposit per branch increased marginally by 0.3% to Kshs 2.07 bn from Kshs 2.06 bn in Q3’2018, with the branch network remaining unchanged at 137 in Q3’2019,
• The faster growth in deposits compared to the decline recorded in loans led to a decline in the loan to deposit ratio to 67.8% from 70.0% in Q3’2018,
• Gross non-performing loans increased by 9.6% to Kshs 17.9 bn in Q3’2019, from Kshs 16.3 bn in Q3’2018. The NPL ratio thus deteriorated to 8.9% in Q3’2019, from 7.8% in Q3’2018. General loan loss provisions recorded a 38.4% decline to Kshs 5.7 bn, from Kshs 9.3 bn in Q3’2018. The NPL coverage, thus, decreased to 48.0% in Q3’2019, from 72.5% in Q3’2018 due to the decrease in general loan loss provisions,
• Shareholders’ funds increased by 13.6% to Kshs 58.9 bn in Q3’2019, from Kshs 51.9 bn in Q3’2018, due to earnings retained since DTBK did not declare any interim dividends
• DTB Kenya Limited is currently sufficiently capitalized with a core capital to risk weighted assets ratio of 19.1%, 8.6% above the statutory requirement. In addition, the total capital to risk weighted assets ratio was 21.2%, exceeding the statutory requirement by 6.7%. Adjusting for IFRS 9, the core capital to risk weighted assets stood at 19.8%, while total capital to risk weighted assets came in at 21.8%, indicating that the bank’s total capital relative to its risk-weighted assets decreased by 0.6% due to the impact of IFRS 9,
• DTB Kenya currently has a return on average assets of 1.9% and a return on average equity of 13.4%.

Key Take-Outs:

1. The bank recorded a relatively weaker earnings performance with total operating income declining by 4.6%. This was largely due to the depressed performance of funded income, with the bank recording declining interest income on loans and advances and government securities. The expansion from the bottom line was largely due to a faster decline in total operating expenses, which was largely derived from the steep 63.7% decline in Loan Loss Provisions (LLP),
2. The bank recorded an improved performance on the NFI income segment, which recorded a 5.7% growth y/y, largely supported by the 41.2% increase in forex trading income, coupled with a 25.1% growth in other income. Consequently, NFI contribution to total income rose to 24.1% from 21.7% in Q3’2019. This however remains below the current industry average of 36.0%.

Going forward, we expect the bank’s growth to be further driven by:

1. Regional Diversification: We continue to expect DTBK’s increased regional presence to aid in enhancing growth. We expect DTBK’s increased focus on other regions to boost the growth in the bottom line, largely supported by the expansion of funded income which has remained subdued largely due to the pricing restriction existent in Kenya. Diversification into other regions would aid the bank in mitigating the sustained effects of compressed margins,
2. Operational Efficiency: DTBK continues to be one of the most efficient banks, and as at Q3’2019, had a cost to income ratio of 52.2%, which was below the market average of 56.7%. Thus, DTBK’s continued focus on maintaining high operational margins coupled with an expanding top line revenue growth will likely lead to consistent growth in the long run.

For more analysis, see the Diamond Trust Bank Kenya Ltd Q3’2019 Earnings Note

Other listed bank releases for Q3’2019 are:

• Equity Group Holdings Plc released their Q3’2019 results, recording a 10.4% increase in core earnings per share to Kshs 4.6, from Kshs 4.2 in Q3’2018, attributed to an 11.2% increase in total operating income to Kshs 54.8 bn from Kshs 49.3 bn in Q3’2018. For more information, Equity Group Holdings Q3'2019 Earnings Note
• KCB Group released their Q3’2019 results, recording a 6.2% increase in core earnings per share to Kshs 6.3, from Kshs 5.9 in Q3’2018, attributed to a 10.0% increase in total operating income to Kshs 59.7 bn, from Kshs 54.2 bn in Q3’2018. For more information, see our KCB Group Q3'2019 Earnings Note
• Co-operative Bank released their Q3’2019 results, recording a 5.5% increase in core earnings per share to Kshs 1.6, from Kshs 1.5 in Q3’2018, attributed to a 10.0% increase in total operating income to Kshs 35.2 bn, from Kshs 32.3 bn in Q3’2018. For more information, see our Co-operative Bank Q3'2019 Earnings Note
• Standard Chartered Bank released their Q3’2019 results, recording a 1.3% decrease in core earnings per share to Kshs 18.1, from Kshs 18.4 in Q3’2018, attributed to a 0.9% increase in total operating expenses to Kshs 12.5 bn, from Kshs 12.4 bn in Q3’2018, with total operating income remaining flat at Kshs 21.6 bn. For more information, see our Standard Chartered Bank of Kenya Plc – Q3’2019 Earnings Note
• NIC Group released their Q3’2019 results, recording a 3.3% decrease in core earnings per share to Kshs 4.4, from Kshs 4.6 in Q3’2018, attributed to a 22.9% increase in total operating expenses to Kshs 8.2 bn, from Kshs 6.6 bn in Q3’2018, which was offset by an increase in total operating income by 15.2% to Kshs 12.6 bn, from Kshs 11.0 bn in Q3’2018. For more information, see our NIC Group Q3'2019 Earnings Note
• Barclays Bank released their Q3’2019 results, recording a 19.0% increase in core earnings per share to Kshs 1.2, from Kshs 1.0 in Q3’2018, attributed to a 3.9% increase in total operating income to Kshs 24.8 bn, from Kshs 23.9 bn in Q3’2018. For more information, see our Barclays Bank of Kenya Plc-Q3'2019 Earnings Note

The table below summarizes the performance of listed banks that have released their Q3’2019 results:

Key takeaways from the table above include:

1. The eleven listed Kenyan banks recorded a 7.7% average increase in core Earnings per Share (EPS), compared to an increase of 16.2% in Q3’2018 for all listed banks. Return on Average Equity (ROaE) increased to 19.6%, from 18.8% in Q3’2018,
2. The banks recorded stronger deposit growth, which came in at 10.9%, faster than the 7.4% growth recorded in the sector in Q3’2018. Interest expenses increased at a slower pace of 4.6%, compared to 12.5% in Q3’2018, indicating the banks have been able to mobilize relatively cheaper deposits,
3. Average loan growth came in at 11.6%, which was faster than the 4.2% recorded in the sector in Q3’2018, indicating that there was an improvement in credit extension by the banks. Government securities recorded a growth of 3.2% y/y, which was slower compared to the loans, and a decline from the 17.8% recorded in the sector in Q3’2018. This highlights that banks are beginning to adjust their business models back to private sector lending as opposed to investing in government securities, as the yields on government securities declined during the year. Interest income increased by 4.6%, lower than the 6.1% growth recorded in the sector in Q3’2018. Consequently, the Net Interest Income (NII) grew by 4.8% compared to a growth of 3.8% in the sector in Q3’2018,
4. The banks recorded a Net Interest Margin of 7.6%, 37 bps lower than 8.0% the sector recorded in Q3’2018, and,
5. Non-Funded Income grew by 15.6% y/y, faster than the 5.9% recorded in the sector in Q3’2018. The growth in NFI was boosted by the total fee and commission income which improved by 22.5%, compared to the 0.6% growth recorded in the sector Q3’2018, owing to the faster loan growth.

Universe of Coverage

We are “Positive” on equities for investors as the sustained price declines has seen the market P/E decline to below its historical average. We expect increased market activity, and possibly increased inflows from foreign investors, as they take advantage of the attractive valuations, to support the positive performance.

1. Industry Reports

1. During the month, the Kenya Bankers Association released the Housing Price Index Q3’2019, highlighting the dominance of apartments in the real estate market fueled by their affordability, compared to detached units. The key take-outs from the report were as follows;
2. House prices declined by 2.3% in Q3’2019, compared to 1.7% in Q2’2019, attributed to lack of effective demand. According to the report, the demand remains relatively low attributed to tough credit conditions that have resulted in declines in credit advances towards home ownership, in addition to constrained household disposable incomes in the wake of tough economic times,
3. The housing market recorded a 25.0% increase in housing units’ transactions despite the housing supply being characterized by the dwindling of housing approvals and a decline in cement production and consumption, and an overall softened growth of the construction sector. This indicates that the transactions were mainly for units previously in the market rather than new properties,
4. Apartments remained popular accounting for 84.8% of total units in the market, compared to maisonettes and bungalows at 9.7% and 5.6%, respectively. This is attributed to preference of apartments given the relatively low cost of construction, in addition to being relatively affordable to potential homeowners in the wake of financially- constrained households.

The report is in tandem, with the Cytonn Q3’2019 Markets Review, which highlighted that housing units prices depreciated across the market by 0.2% with the tough economic environment exerting pressure on the prices. Nevertheless, we noted that rental yields notably improved across the residential market during Q3’2019, with apartments recording average rental yields of 5.2%, a 0.3% points increase from 4.9% in H1’2019, whereas detached markets recorded an average of 4.6%, 0.7% points higher the 3.9% in H1’2019, mainly attributable to increase in occupancy rates as homebuyers took advantage of the pricing discounts. Therefore, we expect continued focus on relatively affordable housing units, mainly apartments given the current tough financial environment, and an overall improvement in the real estate performance once the economy gets back on track.

Other real estate related reports released during the month include;

2. Residential Sector

1. During the month, the Finance Act 2019 was assented to by the President. In addition to the Act introducing policy and taxation measures for revenue generation in the financial year 2019/2020 for government’s expenditure, it as well focused on supporting the Big Four Agenda, mainly the provision of affordable housing, with some of the key amendments intended to support the same being:
   1. Inclusion of Fund Managers or Investment Banks registered under the Capital Markets Act as approved institutions which can hold deposits of a Home Ownership and Savings Plan (HOSP). This thus means that inspiring home owners can now make savings for purchase of a home through Money Market Funds, through which their money gains interest over time, with the current money market fund yield averaging at 10.0%. This lightens the burden for the homeowners, in addition to benefiting from the tax rebates associated with the HOSP program. We thus expect this to result in more homebuyers registering for units through Boma Yangu portal, noting the current low number of people who have paid up the 12.5% of the home value required for unit allocation which has hindered the running of the lottery of the Park Road Affordable Housing Project. Please see our topical on Home Ownership Savings Plan, "HOSP" Schemes in Kenya for more information on how the HOSP program operates,
   2. Stamp duty exemption on the transfer of a house constructed under the affordable housing scheme from the developer to the National Housing Corporation, and,
   3. Exemption of goods supplied for the direct and exclusive use in the construction of houses under the affordable housing scheme (AHS) from Value Added Tax (VAT).
   4. We expect this to enhance home ownership in Kenya, by not only supporting potential home owners but also developers. For more information, see Cytonn Weekly#45/2019.
2. The Government of Kenya announced that the first lottery on the Park Road affordable housing project in Ng’ara was set to be conducted at the end of this month, following the completion of the first phase of the project, comprising of 228 housing units. However, this did not happen and according to Principal Secretary for Housing, Hon. Charles Hinga, approximately sixty people have paid up the 12.5% of the home value required for unit allocation under Boma Yangu, which translates to 0.4% of the 14,800 Kenyans who are actively making contributions, through the National Housing Development Fund. For more information, see Cytonn Weekly#47/2019,
3. Vaal Real Estate, an Egyptian and Turkish owned developer, launched a 15-floor residential development along Elgeyo Marakwet road in Kilimani Area, Nairobi. The development dubbed “Wilma Towers” will comprise of 227- 1, 2- and 3-bedrooms units, built on half an acre, and is set for completion in October 2020. The units, sized at 45 sqm, 80 sqm and 100 sqm, are priced at Kshs 4.9 mn, Kshs 11.6 mn and Kshs 14.6 mn, respectively, which translates to an average of Kshs 133,296 per SQM. The price is 8.6% higher than the Kilimani market average of Kshs 121,845 per SQM as per the Nairobi Metropolitan Area Residential Report 2018/2019. For more analysis, see Cytonn Weekly#45/2019,
4. Superior Homes Kenya launched its Kshs 7.0 bn residential development dubbed “Pazuri” located on 105-acres at Vipingo Ridge in Kilifi County. The project will consist of 372 units of 2-bed, 3-bed bungalows, and 4-bed villas of 110 SQM, 163 SQM, and 220 SQM, respectively. The units will be priced at Kshs 11.9 mn, Kshs 14.9 mn, and Kshs 18.9 mn, respectively, translating to an average price of Kshs 95,695 per SQM. The prices are 20.3% lower than the upper mid-end residential average of Kshs 115,199 per SQM in neighboring Mombasa County. For more analysis, see Cytonn Weekly #46/2019,
5. Belasi, a local real estate developer, announced plans of putting up a 30-unit project off Kenyatta Road in Juja. The project, dubbed Summer Green, will entail three-bedroom bungalows with a plinth area of 135 SQM. For analysis, see Cytonn Weekly #47/2019, and,
6. Nairobi County Government held a meeting aimed at kicking off redevelopment of Jevanjee Estate as part of the Nairobi Urban Renewal Project. The redevelopment which is slated to start in a month will see 3,000 units put up at an estimated cost of Kshs 9.1 bn (timelines undisclosed). For analysis, see Cytonn Weekly #47/2019.

We expect the residential sector to continue recording increased activities fueled by the continued focus on the Big Four Agenda on provision of affordable housing units by both the government and the private sector. However the sector continues to face challenges such as the low contribution towards homeownership through the Boma Yangu portal.

3. Retail Sector

1. During the month, Quickmart, a local supermarket chain, opened their latest outlet on Magadi Road in Ongata Rongai, Kajiado County. The 24,000 SQFT standalone structure built by the retailer is its twelfth outlet after Lavington and Waiyaki Way opened in January 2019 and August 2019, respectively. Satellite towns such as Ongata Rongai, Ruiru and Ruaka are increasingly attracting retailers driven by (i) affordability of land prices at Kshs 25.5 mn per acre compared to the average land prices of Kshs 134.0 mn per acre within Nairobi as at September 2019, (ii) positive demographics with these areas acting as the Nairobi dormitory areas thus creating demand for consumer goods & retail services, and, (iii) relatively low-priced retail spaces at Kshs 131.4 per SQFT, 28.3% lower than market average of Kshs 168.6 per SQFT. For more analysis, see Cytonn Weekly #46/2019
2. Local retailer, Nakumatt, closed its Kisumu branch located at Megacity Mall, leaving the retailer with just five remaining branches countrywide. Such closures have led to increase in entry of international players who continue to make inroads in the country taking over locations operated by the cash-strapped local retailers. Nakumatt’s closure, follows the entry of South Africa-based retailer, Game, which set up shop at Mega City Mall earlier in 2019. For more analysis, see Cytonn Weekly #47/2019
3. An unfinished mall located along the Eastern Bypass was put up for sale at an asking price of Kshs 200.0 mn. The 116,000 SQFT development whose construction has stalled is set to have space for two anchor tenants as well as office space. For analysis, see Cytonn Weekly #47/2019

Despite the existing oversupply of space, we expect increased market activities within the retail sector, driven by the continued expansion of the local retailers such as Quickmart to cushion the sector’s performance.

4. Hospitality Sector

1. In line with their regional expansion strategy, Jambojet airline made its inaugural flight to Kigali on Tuesday, 26^th The airline, a subsidiary of Kenya’s National Carrier, Kenya Airways, will be flying once daily from its hub at Jomo Kenyatta International Airport, Nairobi to Kigali International Airport, Rwanda. Currently, Jambojet flies to 5 local destinations - Malindi, Ukunda, Mombasa, Kisumu and Eldoret, as well as one regional destination - Entebbe, Uganda - from its hub in Nairobi. The move is in a bid to enable more passengers to fly affordably and reliably between Kigali and Nairobi. This is a plus for the hospitality sector in Kenya, as we expect this to attract more tourists from Rwanda, and other corners of the world connecting through Kigali International Airport, and,
2. During the month, Kenyatta International Conference Center (KICC) was marketed at the IBTM (Global Incentive and Business, Travel and Meetings) Event, a leading global event for the meetings, incentives, conferences and events industry, which takes place annually in Barcelona, Spain and attracts approximately 15,000 global conference industry players. This follows the recent formation of the National Convention Bureau by the Kenya Tourism Board, whose main objective includes serving as the focal point of the Meetings, Incentives, Conventions, and Exhibitions (MICE) activities, as well as marketing and selling Kenya as a business events destination. For more analysis, see Cytonn Weekly #47/2019.

We expect the stable political environment and improved security, in addition to the improving air transport services and continued marketing of Kenya as a business destination to continue driving the performance of the hospitality sector.

5. Infrastructure Sector

1. Transport Secretary James Macharia announced that the railway track from Nakuru to Kisumu would be upgraded at a cost of Kshs 3.8 bn. The project, which is expected to start in the coming months, will connect from Nakuru to the Kisumu port and will mainly be used to ferry cargo to neighboring countries. For more information, see Cytonn Weekly #46/2019,
2. Kenya Urban Roads Authority (KURA) announced the completion of the newly constructed Outer Ring Interchange, set to be commissioned in one month, and is aimed at creating a seamless link to Thika Road, hence, easing traffic snarl ups on the two major roads. For analysis, see Cytonn Weekly #47/2019, and,
3. The Kenyan Government launched the construction of a 40-km 400kv power line which is set to power Konza City, as well as Kajiado, Makueni, and Machakos Counties. The project is a partnership between the Ministry of Energy and China Aerospace Construction Group, a Chinese company, and is aimed at ensuring a steady power supply, especially for the upcoming Konza City. For analysis, see Cytonn Weekly #47/2019.

We expect the continued government focus on infrastructural improvement to play a key role in boosting the country’s economic growth, and real estate development by opening up areas for development.

6. Listed Real Estate

During the month, ICEA Lion Asset Management, a Kenya based fund manager, signed an agreement to acquire Stanlib Kenya, a Kenya based fund manager as well, from South Africa based Liberty Holdings Ltd. The implementation of the Agreement is subject to the fulfillment of conditions, which include, but are not limited to, the approval of the Competition Authority of Kenya, the Capital Markets Authority of Kenya, and the Trustee, by no later than 29^th February 2020. For more analysis, see Cytonn Weekly#45/2019

In terms of performance, during the month, the Fahari I-REIT closed the month at Kshs 8.6, 2.9% lower than the month’s opening price of Kshs 8.9. On average, during the month, the I-REIT traded at an average of Kshs 8.7, 2.4% lower than its YTD average of Kshs 8.9. The I-REIT’s performance and continued drop in its value is as a result of poor market perception and thus, low investor appetite, in addition to unsteadiness in the market following the recent sale to ICEA Lion Asset Management.

We expect the real estate sector to continue recording increased activities supported by; (i) the continued focus on provision of affordable housing by both the government and the private sector, (ii) continued infrastructural improvements, and (iii) vibrant retail and hospitality sectors.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.