By Research Team, Apr 23, 2023
During the week, T-bills were oversubscribed for the third consecutive week, with the overall subscription rate coming in at 146.5%, up from an oversubscription rate of 122.6% recorded the previous week. Investor’s preference for the shorter 91-day paper persisted as they sought to avoid duration risk, with the paper receiving bids worth Kshs 32.0 bn against the offered Kshs 4.0 bn, translating to an oversubscription rate of 799.6%, higher than the 621.9% recorded the previous week. Notably, the 182-day and 364-day papers recorded continued undersubscriptions of 21.5% and 10.2%, from undersubscription rates of 24.7% and 20.7%, respectively, recorded the previous week. The government accepted bids worth Kshs 33.2 bn and rejected Kshs 2.0 bn out of the total Kshs 35.2 bn bids received, translating to an acceptance rate of 94.7%. The yields on the government papers were on upward trajectory, with the yields on the 364-day, 182-day and 91-day papers increasing by 12.7 bps, 4.9 bps and 8.7 bps to 11.1%, 10.5% and 10.2%, respectively;
In the primary market the Central Bank of Kenya released the bond auction results for the re-opened treasury bond FXD1/2022/03 with effective tenor to maturity of 2.1 years. In line with our expectations, the bond was undersubscribed, receiving bids worth Kshs 1.8 bn, against the offered Kshs 30.0 bn, translating to an undersubscription rate of 24.4%, on the back of tightened liquidity in the money market, with the average interbank rate increasing by 0.3% points to 8.7%, from 8.4% recorded the previous week. The government continued to reject expensive bids, accepting bids worth Kshs 1.8 bn out of the Kshs 7.4 bn of total bids received, translating to an acceptance rate of 24.0%;
We are projecting the y/y inflation rate for April 2023 to ease to a range of 8.7% - 9.1%;
During the week, the equities market was on a downward trajectory with NASI, NSE 20 and NSE 25 declining by 3.3%, 1.2% and 1.8%, respectively, taking the YTD performance to losses of 15.3%, 4.9% and 8.6% for NASI, NSE 20 and NSE 25, respectively. The equities market performance was mainly driven by losses recorded by large cap stocks such as Safaricom, EABL of 7.3% and 6.1%, respectively, and banking stocks such as KCB Group and ABSA Bank Kenya of 2.8% each. The losses were however mitigated by gains recorded by stocks such as NCBA Group, Equity Group, and DTB-K of 5.4%, 1.5% and 1.4%, respectively;
During the week, Rogers Group Limited, a Mauritanian investment group disclosed that it recorded a Kshs 113.6 mn gain in a bargain purchase acquisition deal of Rongai Workshop and Transport Limited, a renowned transport and logistics company in Kenya through its logistics subsidiary Velogic Limited. Additionally, a Turkish based manufacturing conglomerate, Turkish Industry Holdings, committed Kshs 48.0 bn towards the construction of five industries situated within the Naivasha Industrial Park, Mai Mahiu, Nakuru County. In Regulated Real Estate Funds, under the Real Estate Investment Trusts (REITs) segment, Fahari I-REIT closed the week trading at an average price of Kshs 6.04 per share in the Nairobi Securities Exchange. On the Unquoted Securities Platform as at 20 April 2023, Acorn D-REIT and I-REIT closed the week trading at Kshs 23.9 and Kshs 20.9 per unit, respectively, a 19.4% and 4.4% gain for the D-REIT and I-REIT, respectively, from the Kshs 20.0 inception price. In addition, Cytonn High Yield Fund (CHYF) closed the week with an annualized yield of 13.7%, remaining relatively unchanged from what was recorded the previous week;
Following the release of the FY’2022 results by Kenyan listed banks, the Cytonn Financial Services Research Team undertook an analysis on the financial performance of the listed banks and identified the key factors that shaped the performance of the sector;
Investment Updates:
Real Estate Updates:
Hospitality Updates:
Money Markets, T-Bills Primary Auction:
During the week, T-bills were oversubscribed for the third consecutive week, with the overall subscription rate coming in at 146.5%, up from an oversubscription rate of 122.6% recorded the previous week. Investor’s preference for the shorter 91-day paper persisted as they sought to avoid duration risk, with the paper receiving bids worth Kshs 32.0 bn against the offered Kshs 4.0 bn, translating to an oversubscription rate of 799.6%, higher than the 621.9% recorded the previous week. Notably, the 182-day and 364-day papers recorded continued undersubscriptions of 21.5% and 10.2%, from undersubscription rates of 24.7% and 20.7%, respectively, recorded the previous week. The government accepted bids worth Kshs 33.2 bn and rejected Kshs 2.0 bn out of the total Kshs 35.2 bn bids received, translating to an acceptance rate of 94.7%. The yields on the government papers were on upward trajectory, with the yields on the 364-day, 182-day and 91-day papers increasing by 12.7 bps, 4.9 bps and 8.7 bps to 11.1%, 10.5% and 10.2%, respectively. The chart below compares the overall average T- bills subscription rates obtained in 2017, 2022 and 2023 Year to Date (YTD):
In the primary market the Central Bank of Kenya released the bond auction results for the re-opened treasury bond FXD1/2022/03 with effective tenor to maturity of 2.1 years. In line with our expectations, the bond was undersubscribed, receiving bids worth Kshs 1.8 bn, against the offered Kshs 30.0 bn, translating to an undersubscription rate of 24.4%, on the back of tightened liquidity in the money market, with the average interbank rate increasing by 0.3% points to 8.7%, from 8.4% recorded the previous week. The government continued to reject expensive bids, accepting bids worth Kshs 1.8 bn out of the Kshs 7.4 bn of total bids received, translating to an acceptance rate of 24.0%. The accepted weighted average yield for the bond came in at 13.9%, while the coupon rate was 11.8%. Key to note, the government cancelled the auction results for the FXD1/2019/15 with tenor to maturity of 10.9 years as investors continued to prefer shorter dated papers evidenced by the 799.6% oversubscription for the 91-day T-bill.
Money Market Performance:
In the money market, the 3-month bank placements closed the week at 7.7%, similar to what was recorded the previous week (based on what we have been offered by various banks). The average yield on the 91-day and 364-day T-bills increased by 0.1% points and 0.2% points to 10.2% and 11.1%, from 10.1% and 10.9%, respectively, recorded the previous week. On the other hand, yields on the average Top 5 Money Market Funds and Cytonn Money Market Fund remained relatively unchanged at 10.7% and 11.0%, respectively, from what was recorded last week.
The table below shows the Money Market Fund Yields for Kenyan Fund Managers as published on 21 April 2023:
Cytonn Report: Money Market Fund Yield for Fund Managers as published on 21 April 2023 |
||
Rank |
Fund Manager |
Effective Annual Rate |
1 |
Cytonn Money Market Fund (dial *809# or download Cytonn App) |
11.0% |
2 |
Madison Money Market Fund |
10.8% |
3 |
Etica Money Market Fund |
10.8% |
4 |
Apollo Money Market Fund |
10.6% |
5 |
Dry Associates Money Market Fund |
10.5% |
6 |
Jubilee Money Market Fund |
10.3% |
7 |
Enwealth Money Market Fund |
10.1% |
8 |
Kuza Money Market fund |
10.0% |
9 |
AA Kenya Shillings Fund |
10.0% |
10 |
NCBA Money Market Fund |
9.9% |
11 |
Zimele Money Market Fund |
9.9% |
12 |
Old Mutual Money Market Fund |
9.9% |
13 |
Sanlam Money Market Fund |
9.8% |
14 |
Nabo Africa Money Market Fund |
9.8% |
15 |
GenAfrica Money Market Fund |
9.6% |
16 |
GenCap Hela Imara Money Market Fund |
9.6% |
17 |
CIC Money Market Fund |
9.4% |
18 |
KCB Money Market Fund |
9.4% |
19 |
Co-op Money Market Fund |
9.4% |
20 |
British-American Money Market Fund |
9.4% |
21 |
Orient Kasha Money Market Fund |
9.4% |
22 |
ICEA Lion Money Market Fund |
9.1% |
23 |
Absa Shilling Money Market Fund |
8.6% |
24 |
Mali Money Market Fund |
8.2% |
25 |
Equity Money Market Fund |
6.7% |
Source: Business Daily, M-PESA App
Liquidity:
During the week, liquidity in the money markets continued to tighten, with the average interbank rate increasing to 8.7%, from 8.4% recorded the previous week, partly attributable to tax remittances that offset government payments. However, the average interbank volume traded increased by 13.3% to Kshs 27.2 bn, from Kshs 24.0 bn recorded the previous week. The chart below shows the interbank rates in the market over the years:
Source: CBK
Kenya Eurobonds:
During the week, the yields on Eurobonds were on an upward trajectory with the yield on the 10-year Eurobond issued in 2014, increasing the most, having increased by 0.8% points to 15.5%, from 14.7% recorded the previous week. The rise in the country’s Eurobond yields is mainly on the back of increased concerns about the continued depreciation of the Kenyan shilling, United States dollar shortages currently experienced in the economy and increased debt servicing concerns with debt service to revenue coming in at 56.4% as of March 2023, compared to 54.2% recorded in February 2023. The table below shows the summary of the performance of the Kenyan Eurobonds as of 19 April 2023;
Cytonn Report: Kenya Eurobonds Performance |
||||||
2014 |
2018 |
2019 |
2021 |
|||
Date |
10-year issue |
10-year issue |
30-year issue |
7-year issue |
12-year issue |
12-year issue |
Amount Issued (USD bn) |
2.0 |
1.0 |
1.0 |
0.9 |
1.2 |
1.0 |
Years to Maturity |
1.2 |
5.0 |
25.0 |
4.2 |
9.2 |
11.3 |
Yields at Issue |
6.6% |
7.3% |
8.3% |
7.0% |
7.9% |
6.2% |
02-Jan-23 |
12.9% |
10.5% |
10.9% |
10.9% |
10.8% |
9.9% |
03-Apr-23 |
13.7% |
12.2% |
11.4% |
13.2% |
11.6% |
11.2% |
13-Apr-23 |
14.7% |
12.7% |
11.7% |
13.6% |
12.1% |
11.6% |
14-Apr-23 |
14.8% |
12.7% |
11.7% |
13.6% |
12.1% |
11.5% |
17-Apr-23 |
14.8% |
12.8% |
11.8% |
13.6% |
12.2% |
11.6% |
18-Apr-23 |
15.0% |
12.8% |
11.9% |
13.6% |
12.2% |
11.6% |
19-Apr-23 |
15.5% |
13.0% |
12.0% |
13.9% |
12.4% |
11.8% |
Weekly Change |
0.8% |
0.3% |
0.3% |
0.3% |
0.3% |
0.2% |
MTD change |
1.8% |
0.8% |
0.6% |
0.7% |
0.8% |
0.7% |
YTD Change |
2.6% |
2.5% |
1.2% |
3.0% |
1.7% |
2.0% |
Source: Central Bank of Kenya (CBK) and National Treasury
Kenya Shilling:
During the week, the Kenya Shilling depreciated by 0.6% against the US dollar to close the week at Kshs 135.2, from Kshs 134.4 recorded the previous week, partly attributable to increased dollar demand from manufacturers and importers, especially oil and energy sectors against a slower supply of hard currency. On a year to date basis, the shilling has depreciated by 9.5% against the dollar, adding to the 9.0% depreciation recorded in 2022. We expect the shilling to remain under pressure in 2023 as a result of:
The shilling is however expected to be supported by:
Key to note, Kenya’s forex reserves increased to USD 6.5 bn as at 19 April 2023, slightly higher than USD 6.4 bn recorded the previous week. As such, the country’s months of import cover also remained unchanged at 3.6 months, similar to what was recorded the previous week, and below the statutory requirement of maintaining at least 4.0-months of import cover. The chart below summarizes the evolution of Kenya months of import cover over the last 10 years:
*Figure as of 19 April 2023
Weekly Highlight:
We are projecting the y/y inflation rate for April 2023 to decline to a range of 8.7%-9.1% mainly on the back of:
Going forward, we expect the inflationary pressures to remain elevated and above the Government’s target range of 2.5%-7.5%, but to ease gradually in the medium to long term. Notably, we expect the ongoing government strategies such as fertilizer subsidization and importation of duty-free maize and rice to lower the cost of agricultural production and stabilizes prices of key commodities, respectively. Additionally, the currently ongoing rains in various parts of the country is expected to increase maize production. Consequently, the improved maize production coupled with additional maize importation is expected to ease food inflation with maize flour being a major inflationary factor. Notably, the government’s plan to do away with the fuel subsidies as part of its austerity measures may keep fuel prices elevated in the medium term. However, the full anchoring of the domestic inflationary pressures is largely pegged on how soon the global supply chain is restored.
Rates in the Fixed Income market have been on upward trend given the continued government’s demand for cash and the relatively tightened liquidity in the money market. The government is 11.0% ahead of its prorated borrowing target of Kshs 346.9 bn having borrowed Kshs 385.1 bn of the revised domestic borrowing target of Kshs 425.1 bn as per the March 2023 revised domestic borrowing target for FY’2022/23. We believe that the projected budget deficit of 5.7% is relatively ambitious given the downside risks and deteriorating business environment occasioned by high inflationary pressures. Further, revenue collections are lagging behind, with total revenue as at March 2023 coming in at Kshs 1.4 tn in the FY’2022/2023, equivalent to 65.9% of its revised target of Kshs 2.2 tn and 87.9% of the prorated target of Kshs 1.6 tn. Therefore, we expect a continued upward readjustment of the yield curve in the short and medium term, with the government looking to bridge the fiscal deficit through the domestic market. Owing to this, our view is that investors should be biased towards short-term fixed-income securities to reduce duration risk.
Market Performance:
During the week, the equities market was on a downward trajectory with NASI, NSE 20 and NSE 25 declining by 3.3%, 1.2% and 1.8%, respectively, taking the YTD performance to losses of 15.3%, 4.9% and 8.6% for NASI, NSE 20 and NSE 25, respectively. The equities market performance was mainly driven by losses recorded by large cap stocks such as Safaricom and EABL of 7.3% and 6.1%, respectively, and banking stocks such as KCB Group and ABSA Bank Kenya of 2.8% each. The losses were however mitigated by gains recorded by stocks such as NCBA Group, Equity Group, and DTBK of 5.4%, 1.5% and 1.4%, respectively.
During the week, equities turnover decreased by 39.2% to USD 4.7 mn from USD 7.7 mn recorded the previous week, taking the YTD turnover to USD 372.2 mn. Foreign investors turned net sellers, with a net selling position of USD 1.0 mn, from a net buying position of USD 1.5 mn recorded the previous week, taking the YTD net selling position to USD 41.9 mn.
The market is currently trading at a price to earnings ratio (P/E) of 5.3x, 57.4% below the historical average of 12.4x. The dividend yield stands at 8.8%, 4.6% points above the historical average of 4.2%. Key to note, NASI’s PEG ratio currently stands at 0.7x, an indication that the market is undervalued relative to its future growth. A PEG ratio greater than 1.0x indicates the market is overvalued while a PEG ratio less than 1.0x indicates that the market is undervalued. The charts below indicate the historical P/E and dividend yields of the market;
Universe of coverage:
Company |
Price as at 14/04/2023 |
Price as at 20/04/2023 |
w/w change |
YTD Change |
Year Open 2023 |
Target Price* |
Dividend Yield |
Upside/ Downside** |
P/TBv Multiple |
Recommendation |
Liberty Holdings |
3.7 |
4.0 |
6.7% |
(21.4%) |
5.0 |
6.8 |
0.0% |
70.5% |
0.3x |
Buy |
Jubilee Holdings |
158.8 |
189.3 |
19.2% |
(4.8%) |
198.8 |
305.9 |
6.3% |
68.0% |
0.3x |
Buy |
Britam |
4.6 |
4.3 |
(5.0%) |
(16.5%) |
5.2 |
7.1 |
0.0% |
64.1% |
0.7x |
Buy |
Sanlam |
8.0 |
7.8 |
(2.0%) |
(18.2%) |
9.6 |
11.9 |
0.0% |
51.9% |
0.8x |
Buy |
Kenya Reinsurance |
1.8 |
1.8 |
0.5% |
(2.1%) |
1.9 |
2.5 |
10.9% |
48.1% |
0.1x |
Buy |
KCB Group*** |
33.9 |
33.0 |
(2.8%) |
(14.1%) |
38.4 |
45.5 |
6.1% |
44.2% |
0.5x |
Buy |
NCBA*** |
37.0 |
39.0 |
5.4% |
0.1% |
39.0 |
48.7 |
10.9% |
35.9% |
0.8x |
Buy |
CIC Group |
1.9 |
1.8 |
(6.7%) |
(5.2%) |
1.9 |
2.3 |
7.2% |
35.4% |
0.6x |
Buy |
Equity Group*** |
44.5 |
45.2 |
1.5% |
0.2% |
45.1 |
56.3 |
8.9% |
33.6% |
0.9x |
Buy |
ABSA Bank*** |
12.7 |
12.4 |
(2.8%) |
1.2% |
12.2 |
15.1 |
10.9% |
33.5% |
1.0x |
Buy |
Co-op Bank*** |
13.0 |
13.1 |
0.4% |
7.9% |
12.1 |
15.9 |
11.5% |
33.3% |
0.6x |
Buy |
I&M Group*** |
20.6 |
20.3 |
(1.5%) |
18.8% |
17.1 |
24.5 |
11.1% |
32.0% |
0.4x |
Buy |
Diamond Trust Bank*** |
53.0 |
53.8 |
1.4% |
7.8% |
49.9 |
64.6 |
9.3% |
29.5% |
0.3x |
Buy |
Standard Chartered*** |
170.0 |
170.0 |
0.0% |
17.2% |
145.0 |
195.4 |
12.9% |
27.9% |
1.1x |
Buy |
Stanbic Holdings |
110.8 |
114.5 |
3.4% |
12.3% |
102.0 |
131.8 |
11.0% |
26.1% |
0.8x |
Buy |
HF Group |
3.8 |
3.8 |
0.3% |
21.3% |
3.2 |
4.5 |
0.0% |
16.5% |
0.2x |
Accumulate |
*Target Price as per Cytonn Analyst estimates **Upside/ (Downside) is adjusted for Dividend Yield ***For Disclosure, these are stocks in which Cytonn and/or its affiliates are invested in |
We are “Neutral” on the Equities markets in the short term due to the current adverse operating environment and huge foreign investor outflows, and, “Bullish” in the long term due to current cheap valuations and expected global and local economic recovery.
With the market currently trading at a discount to its future growth (PEG Ratio at 0.7x), we believe that investors should reposition towards value stocks with strong earnings growth and that are trading at discounts to their intrinsic value. We expect the current high foreign investors sell-offs to continue weighing down the equities outlook in the short term.
During the week, Rogers Group Limited, a Mauritanian investment group disclosed that it recorded a Kshs 113.6 mn gain in a bargain purchase acquisition deal of Rongai Workshop and Transport Limited, a renowned transport and logistics company in Kenya, through its logistics subsidiary Velogic Limited. A bargain purchase occurs when a company is bought at a price that is less than the fair market value of its net assets, and difference is then recorded as a gain. The Mauritian conglomerate announced that it had completed the acquisition of the trucking company in March 2023, but was yet to disclose the value of the transaction. However notwithstanding, the investment firm has not yet revealed the amount it paid in the transaction. The move by Rogers Group is part of its international development strategy which aims at strengthening its footprint in emerging high growth markets as it reinforces its commitment in positioning itself in buoyant African markets.
Rongai Workshop and Transport Limited is one of the largest road transport company in the country in terms of territorial destinations served, with a long-standing presence in the country tracking 75 years, and boosts of a fleet of 160 vehicles. The acquisition will enable Velogic Limited, which has been operational since 2016 to offer a broader range of logistics services, and to expand its customer base and transport network in the East African region. Additionally, the firm is planning to expand into Rwanda through Rogers Capital, its Finance and Technology segment, further reinforcing the significance of the East African region in its expansion plan and development strategy for exponential growth. Other major trucking firms in the country include; Bollore Logistics, Siginon Global Logistics, DHL, Acceler Global Logistics, Multiple Hauliers, Mitchell Cotts, and Anwaralli Limited among others.
During the week, a Turkish based manufacturing conglomerate, Turkish Industry Holdings, committed Kshs 48.0 bn towards the construction of five industries situated within the Naivasha Industrial Park, Mai Mahiu, Nakuru County. The move by the investor comes less than a month after concerns raised by the National Assembly Trade, Industry and Cooperatives Committee over stalled construction at the park which requires Kshs 4.5 bn to become fully operational, and has contributed towards revitalizing investments within the industrial park. The project which is valued at Kshs 90.0 bn, was commissioned by President Uhuru Kenyatta in July 2022 during the official opening of the 1,000-acre Special Economic Zone (SEZ), and consists of six manufacturing industries set across 400 acres within the SEZ. The industries which will be involved in the production of construction, forestry, furniture and cleaning products are planned to be constructed in phases. The expansive complex dubbed, ‘Turkish Industry Zone (TIZ)’ is projected to become fully operational within five years.
Moreover, four other investors have been allocated an additional 60 acres namely; i) Jumbo Holding Limited specializing in motor vehicle assembly and agricultural machinery, ii) Jafrom Limited dealing in construction of cold store materials, iii) Eriksen Limited which is involved in leather and textile production, and, iv) Sino Excellence Limited, a warehousing developer. We anticipate these crucial investments will assist in boosting Foreign Direct Investments (FDIs) into the country as well as set precedence for other local and international investors to invest at the park. This we expect will be fuelled by incentives offered in the SEZ including administrative and tax exemptions, and cheaper power tariffs. However, the lack of sufficient infrastructure such as roads, water and electricity within the industrial park continues to hamper optimum development and investments by hindering investor confidence. Notably, the park has significant potential to provide employment to around 16,000 young people once it is fully operational. This makes it an important initiative in tackling the current unemployment rate, currently standing at 4.9%, as at December 2022.
We expect the project will; i) improve the living standards and quality of life of surrounding residents by creating an estimated 2,860 direct jobs, ii) boost the economy of the country by injecting an estimated USD 530.0 mn (Kshs 716.6 bn) into the Kenyan economy, iii) support the development of the manufacturing industry in Kenya, and iv) advance the government’s industrialization agenda.
In the Nairobi Securities Exchange, ILAM Fahari I-REIT closed the week trading at an average price of Kshs 6.04 per share. The performance represented a 0.3% gain from Kshs 6.02 per share recorded the previous week, taking it to a 10.9% Year-to-Date (YTD) decline from Kshs 6.8 per share recorded on 3 January 2023. In addition, the performance represented a 69.8% Inception-to-Date (ITD) loss from the Kshs 20.0 price. The dividend yield currently stands at 10.8%. The graph below shows Fahari I-REIT’s performance from November 2015 to 20 April 2023;
In the Unquoted Securities Platform, Acorn D-REIT and I-REIT traded at Kshs 23.9 and Kshs 20.9 per unit, respectively, as at 20 April 2023. The performance represented a 19.4% and 4.4% gain for the D-REIT and IREIT, respectively, from the Kshs 20.0 inception price. The volumes traded for the D-REIT and I-REIT came in at 12.3 mn and 29.6 mn shares, respectively, with a turnover of Kshs 257.5 mn and Kshs 603.2 mn, respectively, since inception in February 2021.
REITs provide numerous advantages, including; access to more capital pools, consistent and prolonged profits, tax exemptions, diversified portfolios, transparency, liquidity and flexibility as an asset class. Despite these benefits, the performance of the Kenyan REITs market remains limited by several factors such as; i) insufficient investor understanding of the investment instrument, ii) time-consuming approval procedures for REIT creation, iii) high minimum capital requirements of Kshs 100.0 mn for trustees, and, iv) high minimum investment amounts set at Kshs 5.0 mn discouraging investments.
Cytonn High Yield Fund (CHYF) closed the week with an annualized yield of 13.7% remaining relatively unchanged from what was recorded the previous week. The performance also represented a 0.2% points Year-to-Date (YTD) decline from 13.9% yield recorded on 1 January 2023, and 2.0% points Inception-to-Date (ITD) loss from the 15.7% yield. The graph below shows Cytonn High Yield Fund’s performance from November 2015 to 20 April 2023;
Notably, the CHYF has outperformed other regulated Real Estate funds with an annualized yield of 13.7%, as compared to Fahari I-REIT and Acorn I-REIT with yields of 10.8%, and 6.8% respectively. As such, the higher yields offered by CHYF makes the fund one of the best alternative investment resource in the Real Estate sector. The graph below shows the yield performance of the Regulated Real Estate Funds;
*FY’2022
Source: Cytonn Research
We anticipate a sustained upward trend in Kenya's Real Estate sector performance propelled by various factors, including a heightened emphasis on the industrial sector that will broaden the scope for Real Estate opportunities. However, factors such as rising costs of construction due to inflationary pressures, a surplus of physical space in specific sectors, and low investor appetite for REITs are expected to continue subduing the optimal performance of the general Real Estate sector.
Following the release of the FY’2022 results by Kenyan listed banks, the Cytonn Financial Services Research Team undertook an analysis on the financial performance of the listed banks and identified the key factors that shaped the performance of the sector. For the earnings notes of the various banks, click the links below:
The Core Earnings per Share (EPS) for the listed banks recorded a weighted growth of 26.6% in FY’2022, compared to a weighted growth of 82.9% recorded in FY’2021, indicating the banking sector’s continued resilience despite the tough operating business environment occasioned by elevated inflationary pressures. The performance in FY’2022 was mainly attributable to a 31.6% growth in non-funded income coupled with a 19.2% growth in net interest income. Additionally, the listed banks’ Asset Quality improved with weighted average NPL ratio declining by 0.6% points to 11.7% in FY’2022, from 12.3% in FY’2021. We however note that despite this improvement in the asset quality, the NPL ratio remains higher than the 10-year average of 8.8%.
The report is themed “Banks Maintain Strong Profitability Despite Challenging Business Environment” where we assess the key factors that influenced the performance of the banking sector in FY’2022, the key trends, the challenges banks faced, and areas that will be crucial for growth and stability of the banking sector going forward. As such, we shall address the following:
Section I: Key Themes That Shaped the Banking Sector Performance in FY’2022
Below, we highlight the key themes that shaped the banking sector in FY’2022 which include; regulation, regional expansion through mergers and acquisitions, asset quality and capital raising for onward lending:
Since the gazettement of the regulation last year, CBK has received a total of 401 applications, with only 32 DCPS having been licensed as of March 2023, while the other applicants are at different stages of approval process. The application period for licensing elapsed in September 2022 and the authority noted that all unregulated DCPs and those which did not apply for licensing will cease operations.
The following are developments that happened after FY’2022:
On 14 December 2022, KCB Group announcedthat it had completed acquisition of the 85.0% stake in Trust Merchant Bank (TMB), after receiving all the regulatory approvals. This came after KCB Group entered into a definitive agreement with the shareholders of TMB in August 2022 to acquire 85.0% of the shares in the Democratic Republic of Congo (DRC)- based lender, with an option to acquire the remaining stake after two years. This acquisition made KCB Group the second Kenyan banking group to enter the DRC banking market after Equity Group Holdings, with KCB Group now having its presence in seven countries. For this acquisition, KCB Group had not disclosed the actual value of the deal but as highlighted in our Cytonn Weekly 31/2022, KCB Group had cited that they would pay a cash consideration based on the net asset value of TMB at completion of the proposed transaction using a Price to Book (P/B) multiple of 1.5x.
The following are Mergers and Acquisitions that happened after FY’2022:
Below is a summary of the deals in the last 9 years that have either happened, been announced or expected to be concluded:
Cytonn Report: Summary of Acquisition Deals |
||||||
Acquirer |
Bank Acquired |
Book Value at Acquisition (Kshs bn) |
Transaction Stake |
Transaction Value (Kshs bn) |
P/Bv Multiple |
Date |
Equity Group |
Spire Bank |
0.01 |
Undisclosed |
Undisclosed |
N/A |
Sep-22* |
KCB Group PLC |
Trust Merchant Bank (TMB) |
12.4 |
85.0% |
15.7 |
1.5x |
August-22 |
Access Bank PLC (Nigeria) |
Sidian Bank |
4.9 |
83.4% |
4.3 |
1.1x |
June-22* |
KCB Group |
Banque Populaire du Rwanda |
5.3 |
100.0% |
5.6 |
1.1x |
August-21 |
I&M Holdings PLC |
Orient Bank Limited Uganda |
3.3 |
90.0% |
3.6 |
1.1x |
April-21 |
KCB Group** |
ABC Tanzania |
Unknown |
100% |
0.8 |
0.4x |
Nov-20* |
Co-operative Bank |
Jamii Bora Bank |
3.4 |
90.0% |
1 |
0.3x |
Aug-20 |
Commercial International Bank |
Mayfair Bank Limited |
1.0 |
100.0% |
Undisclosed |
N/D |
May-20* |
Access Bank PLC (Nigeria) |
Transnational Bank PLC. |
1.9 |
100.0% |
1.4 |
0.7x |
Feb-20* |
Equity Group ** |
Banque Commerciale Du Congo |
8.9 |
66.5% |
10.3 |
1.2x |
Nov-19* |
KCB Group |
National Bank of Kenya |
7.0 |
100.0% |
6.6 |
0.9x |
Sep-19 |
CBA Group |
NIC Group |
33.5 |
53%:47% |
23.0 |
0.7x |
Sep-19 |
Oiko Credit |
Credit Bank |
3.0 |
22.8% |
1 |
1.5x |
Aug-19 |
CBA Group** |
Jamii Bora Bank |
3.4 |
100.0% |
1.4 |
0.4x |
Jan-19 |
AfricInvest Azure |
Prime Bank |
21.2 |
24.2% |
5.1 |
1.0x |
Jan-18 |
KCB Group |
Imperial Bank |
Unknown |
Undisclosed |
Undisclosed |
N/A |
Dec-18 |
SBM Bank Kenya |
Chase Bank Ltd |
Unknown |
75.0% |
Undisclosed |
N/A |
Aug-18 |
DTBK |
Habib Bank Kenya |
2.4 |
100.0% |
1.8 |
0.8x |
Mar-17 |
SBM Holdings |
Fidelity Commercial Bank |
1.8 |
100.0% |
2.8 |
1.6x |
Nov-16 |
M Bank |
Oriental Commercial Bank |
1.8 |
51.0% |
1.3 |
1.4x |
Jun-16 |
I&M Holdings |
Giro Commercial Bank |
3.0 |
100.0% |
5.0 |
1.7x |
Jun-16 |
Mwalimu SACCO |
Equatorial Commercial Bank |
1.2 |
75.0% |
2.6 |
2.3x |
Mar-15 |
Centum |
K-Rep Bank |
2.1 |
66.0% |
2.5 |
1.8x |
Jul-14 |
GT Bank |
Fina Bank Group |
3.9 |
70.0% |
8.6 |
3.2x |
Nov-13 |
Average |
78.9% |
1.2x |
||||
* Announcement Date ** Deals that were dropped |
In 2022 the acquisition valuations for banks dropped to 1.2x from 1.3x recorded in 2021. As such, the valuations still remain low compared to historical prices paid as highlighted in the chart below;
As at the end of FY’2022, the number of commercial banks in Kenya stood at 38, same as in FY’2021 but lower than 43 licensed banks in FY’2015, respectively. The ratio of the number of banks per 10 million populations in Kenya now stands at 6.7x, which is a reduction from 9.0x in FY’2015 demonstrating continued consolidation in the banking sector. However, despite the ratio improving, Kenya still remains overbanked as the number of banks remains relatively high compared to the African major economies. To bring the ratio to 5.5x, we ought to reduce the number of banks from the current 38 banks to 32 banks. For more on this see our topical.
Source: World Bank, Central Bank of Kenya, South Africa Reserve Bank, Central Bank of Nigeria; * Data as of March 2023
The table below highlights the asset quality for the listed banking sector:
Cytonn Report: Listed Banks Asset Quality |
||||||
|
FY'2022 NPL Ratio* |
FY'2021 NPL Ratio** |
% point change in NPL Ratio |
FY'2022 NPL Coverage* |
FY'2021 NPL Coverage** |
% point change in NPL Coverage |
ABSA |
7.5% |
7.9% |
(0.4%) |
80.5% |
77.7% |
2.8% |
Equity |
8.4% |
8.6% |
(0.2%) |
70.5% |
68.7% |
1.8% |
I&M |
9.7% |
9.5% |
0.2% |
71.9% |
71.4% |
0.5% |
Stanbic |
10.0% |
9.3% |
0.7% |
63.1% |
58.1% |
5.0% |
DTB-K |
12.0% |
12.9% |
(0.9%) |
46.3% |
41.8% |
4.5% |
NCBA |
13.0% |
16.0% |
(3.0%) |
58.5% |
73.6% |
(15.1%) |
Co-op |
14.0% |
14.6% |
(0.6%) |
65.1% |
62.6% |
2.5% |
SCB-K |
14.2% |
16.0% |
(1.8%) |
87.1% |
84.4% |
2.7% |
KCB |
17.0% |
16.6% |
0.4% |
52.4% |
52.9% |
(0.5%) |
HF |
19.7% |
21.1% |
(1.4%) |
78.8% |
73.6% |
5.2% |
Mkt Weighted Average |
11.7% |
12.3% |
(0.6%) |
67.4% |
65.5% |
1.9% |
*Market cap weighted as at 20/04/2022 |
||||||
**Market cap weighted as at 14/04/2021 |
Key take-outs from the table include;
Section II: Summary of the Performance of the Listed Banking Sector in FY’2022:
The table below highlights the performance of the banking sector, showing the performance using several metrics, and the key take-outs of the performance;
Cytonn Report: Listed Banks Performance in FY’2022 |
|||||||||||||
Bank |
Core EPS Growth |
Interest Income Growth |
Interest Expense Growth |
Net Interest Income Growth |
Net Interest Margin |
Non-Funded Income Growth |
NFI to Total Operating Income |
Growth in Total Fees & Commissions |
Deposit Growth |
Growth in Government Securities |
Loan to Deposit Ratio |
Loan Growth |
Return on Average Equity |
HF Group |
138.9% |
8.8% |
0.7% |
18.2% |
5.0% |
63.5% |
28.9% |
(1.9%) |
5.5% |
30.4% |
91.2% |
4.6% |
3.1% |
DTB-K |
53.9% |
18.2% |
23.5% |
14.5% |
5.3% |
43.5% |
28.3% |
19.9% |
16.9% |
5.8% |
66.5% |
15.1% |
10.0% |
NCBA |
34.8% |
12.7% |
11.5% |
13.5% |
5.9% |
36.8% |
49.7% |
5.0% |
7.0% |
4.8% |
55.5% |
14.3% |
17.2% |
I&M |
34.3% |
12.9% |
18.0% |
9.9% |
6.3% |
45.7% |
35.7% |
20.7% |
5.3% |
(9.9%) |
76.4% |
13.3% |
15.3% |
ABSA |
34.2% |
27.5% |
25.9% |
27.9% |
8.2% |
17.2% |
29.7% |
0.3% |
13.0% |
0.7% |
93.4% |
21.1% |
24.3% |
SCB-K |
34.0% |
14.3% |
(6.5%) |
18.1% |
7.0% |
13.5% |
34.6% |
(17.7%) |
5.1% |
10.6% |
50.0% |
10.7% |
22.1% |
CO-OP |
33.2% |
10.9% |
11.0% |
10.9% |
8.9% |
32.7% |
36.1% |
32.7% |
3.9% |
(5.9%) |
80.1% |
9.4% |
21.2% |
Stanbic |
25.7% |
27.3% |
15.2% |
31.8% |
5.9% |
23.7% |
40.9% |
(0.5%) |
19.5% |
42.9% |
87.8% |
16.4% |
15.3% |
KCB |
19.5% |
15.3% |
27.1% |
11.5% |
7.5% |
39.8% |
33.3% |
18.6% |
35.6% |
2.7% |
76.0% |
27.8% |
22.0% |
Equity |
15.1% |
26.8% |
31.7% |
25.0% |
7.2% |
34.5% |
41.1% |
26.2% |
9.7% |
(4.1%) |
67.2% |
20.2% |
26.7% |
FY'22 Mkt Weighted Average* |
26.6% |
19.7% |
20.1% |
19.2% |
7.2% |
31.6% |
37.7% |
13.8% |
13.7% |
3.1% |
71.8% |
18.1% |
21.8% |
FY'21 Mkt Weighted Average** |
82.9% |
13.8% |
11.5% |
15.2% |
7.1% |
10.9% |
34.7% |
16.6% |
13.5% |
18.1% |
69.7% |
13.5% |
20.2% |
*Market cap weighted as at 20/04/2023 |
|||||||||||||
**Market cap weighted as at 14/04/2021 |
Key takeaways from the table include:
The listed banks recorded a 21.8% weighted average Return on average Equity (RoaE), 1.6% points higher than the 20.2% weighted average recorded in FY’2021. Additionally, the entire banking sector’s Return On Equity (ROE) recorded6% points increase to 25.2% in FY’2022, from 21.6% recorded in FY’2021. As such, the Kenyan banking sector continues to record high profitability compared to other economies in the world as highlighted in the chart below:
Source: Online research, * Figure as of FY’2022
Section III: Outlook of the banking sector:
The banking sector continue to remain resilient despite the tough operating environment occasioned by elevated inflationary pressures, as evidenced by the increase in their profitability, with the Core Earnings Per Share (EPS) growing by 26.6%, majorly supported by the continued diversification of revenue by banks. However, we expect profitability to be weighed down in the short to medium term as a result of expected increase in provisioning aimed at cushioning banks from the elevated credit risk arising from persistent inflationary pressures. As such, we expect the future performance of the banking sector to be mainly supported by the following key factors:
Section IV: Brief Summary and Ranking of the Listed Banks:
As per our analysis on the banking sector from a franchise value and a future growth opportunity perspective, we carried out a comprehensive ranking of the listed banks. For the franchise value ranking, we included the earnings and growth metrics as well as the operating metrics shown in the table below in order to carry out a comprehensive review of the banks:
Cytonn Report: Listed Banks Earnings, Growth and Operating Metrics |
||||||||
Bank |
Loan to Deposit Ratio |
Cost to Income (With LLP) |
Return on Average Capital Employed |
Deposits/ Branch (bn) |
Gross NPL Ratio |
NPL Coverage |
Tangible Common Ratio |
Non Funded Income/Revenue |
ABSA Bank |
93.4% |
54.7% |
34.7% |
3.7 |
7.5% |
80.5% |
13.2% |
29.7% |
NCBA Group |
55.5% |
62.2% |
28.1% |
5.0 |
13.0% |
58.5% |
12.5% |
49.7% |
Equity Bank |
67.2% |
59.0% |
34.7% |
3.0 |
8.4% |
70.5% |
11.4% |
41.1% |
KCB Group |
76.0% |
55.9% |
30.8% |
2.3 |
17.0% |
52.4% |
11.7% |
33.3% |
SCBK |
50.0% |
49.7% |
31.3% |
8.7 |
14.2% |
87.1% |
13.8% |
34.6% |
Coop Bank |
80.1% |
59.3% |
28.3% |
2.3 |
14.0% |
65.1% |
16.9% |
36.1% |
Stanbic Bank |
87.7% |
62.1% |
20.5% |
10.1 |
10.0% |
63.1% |
13.3% |
40.9% |
DTBK |
65.5% |
69.1% |
14.0% |
3.0 |
12.0% |
46.3% |
12.9% |
28.3% |
I&M Holdings |
76.4% |
59.8% |
20.5% |
3.8 |
9.7% |
71.9% |
16.2% |
35.7% |
HF Group |
91.2% |
91.6% |
2.2% |
1.8 |
19.7% |
78.8% |
14.9% |
28.9% |
Weighted Average FY’2022 |
71.8% |
58.0% |
30.0% |
4.2 |
11.7% |
67.4% |
13.1% |
37.7% |
Market cap weighted as at 20/04/2022 |
The overall ranking was based on a weighted average ranking of Franchise value (accounting for 60.0%) and intrinsic value (accounting for 40.0%). The Intrinsic Valuation is computed through a combination of valuation techniques, with a weighting of 40.0% on Discounted Cash-flow Methods, 35.0% on Residual Income and 25.0% on Relative Valuation, while the Franchise ranking is based on banks operating metrics, meant to assess efficiency, asset quality, diversification, and profitability, among other metrics. The overall FY’2022 ranking is as shown in the table below:
Cytonn Report: Listed Banks FY’2022 Rankings |
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Bank |
Franchise Value Rank |
Intrinsic Value Rank |
Weighted Rank |
FY'2021 |
FY’2022 |
ABSA |
1 |
4 |
2.8 |
4 |
1 |
Equity Group Holdings Ltd |
4 |
3 |
3.4 |
4 |
2 |
KCB Group Plc |
7 |
1 |
3.4 |
3 |
3 |
Co-operative Bank of Kenya Ltd |
3 |
5 |
4.2 |
2 |
4 |
I&M Holdings |
2 |
6 |
4.4 |
1 |
5 |
NCBA Group Plc |
8 |
2 |
4.4 |
8 |
6 |
SCBK |
5 |
8 |
6.8 |
6 |
7 |
Stanbic Bank/Holdings |
6 |
9 |
7.8 |
7 |
8 |
DTBK |
9 |
7 |
7.8 |
9 |
9 |
HF Group Plc |
10 |
10 |
10 |
10 |
10 |
Major Changes from the FY’2022 Ranking are:
For more information, see our Cytonn FY’2022 Listed Banking Sector Review
Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, 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.