By Cytonn Research, Aug 21, 2022
During the week, T-bills remained undersubscribed, with the overall subscription rate coming in at 82.1%, up from the 72.4% recorded the previous week. The increase in the subscription rate was partly attributable to the relatively eased liquidity in the money market as well as the prevailing high yields on the government securities. Investors’ preference for the shorter 91-day paper persisted, with the paper receiving bids worth Kshs 11.8 bn against the offered Kshs 4.0 bn, translating to a subscription rate of 294.3%, down from the 299.8% recorded the previous week. The subscription rate for the 182-day paper increased to 68.0% from 39.3% while that of the 364-day paper declined to 11.4% from 14.5% recorded the previous week. The yields on the government papers recorded mixed performance with the yields on the 182-day and 91-day papers increasing by 5.9 bps and 10.4 bps to 9.5% and 8.7%, respectively, while the yields on the 364-day paper declined by 1.3 bps to 9.9%. In the Primary Bond Market, the Central Bank of Kenya released results for the recently re-opened bonds; FXD1/2022/03, FXD2/2019/10 and FXD1/2021/20 highlighting that the bonds recorded an undersubscription of 98.3%;
Also during the week, the Energy and Petroleum Regulatory Authority (EPRA) released their monthly statement on the maximum fuel prices in Kenya effective 15th August 2022 to 14th September 2022, highlighting that the fuel prices remained unchanged at Kshs 159.1 per litre for Super Petrol, Kshs 140.0 per litre for Diesel and Kshs 127.9 per litre for Kerosene. Additionally, the National Treasury gazetted the revenue and net expenditures for the first month of FY’2022/2023, ending 31st July 2022 indicating that the total Revenue collected amounted to Kshs 133.2 bn equivalent to 6.2% of the original estimates of Kshs 2,141.6 bn for FY’2022/2023 and is 74.6% of the prorated estimates of Kshs 178.5 bn;
During the week, the equities market was on a downward trajectory with NASI, NSE 20 and NSE 25 declining by 0.4%, 1.1% and 1.0%, respectively, taking their YTD performance to losses of 12.4%, 7.1% and 9.9%, for NASI, NSE 20 and NSE 25, respectively. The equities market performance was mainly driven by losses recorded by large-cap stocks such as Equity Group, EABL, Co-operative Bank, NCBA Bank and BAT of 5.0%, 2.2%, 1.6%, 1.5% and 1.0%, respectively. The losses were however mitigated by gains recorded by stocks such as ABSA, Bamburi, KCB Group and Safaricom of 2.9%, 2.1%, 0.5% and 0.3% respectively;
During the week, Standard Chartered Bank of Kenya Plc, Stanbic Holdings and I&M Holdings released their H1’2022 financial results, indicating an increase in Earnings per share of 10.9%, 36.9% and 15.9%, respectively;
During the week, EA Limited, a subsidiary of the TransCentury PLC, an African infrastructure investment company based in Nairobi Kenya, announced plans to develop an affordable housing project worth USD 250.0 mn (Kshs 29.8 bn) in the Democratic Republic of Congo (DRC). In the Nairobi Stock Exchange, Fahari I-REIT closed the week trading at an average price of Kshs 7.1 per share;
Kenya, like many other countries world over, has faced unprecedented challenges in the recent years which has had a major setback on the economy. One major issue; supply chain bottlenecks remains apparent and continues to worsen with new challenges such as geopolitical pressures and anticipation of increased demand as economies recover. The country is currently dealing with several issues including a high cost of living stemming from the prevailing inflationary pressures and local currency depreciation, rising debt levels currently at 69.1% of GDP as of May 2022 and a deteriorating business environment as consumers continue to cut back on spending. As such, we expect the incoming government to roll up its sleeves, perform a balancing act, and devise ways to stabilize key macroeconomic indicators while also supporting the ongoing economic recovery. This week, we turn our focus to the key economic areas that the incoming government should focus on, given that the electioneering period is over;
Investment Updates:
Real Estate Updates:
Hospitality Updates:
Money Markets, T-Bills Primary Auction:
During the week, T-bills remained undersubscribed, with the overall subscription rate coming in at 82.1%, up from the 72.4% recorded the previous week. The increase in the subscription rate was partly attributable to the relatively eased liquidity in the money market as well as the prevailing high yields on the government securities. Investors’ preference for the shorter 91-day paper persisted, with the paper receiving bids worth Kshs 11.8 bn against the offered Kshs 4.0 bn, translating to a subscription rate of 294.3%, down from the 299.8% recorded the previous week. The subscription rate for the 182-day paper increased to 68.0% from 39.3% while that of the 364-day paper declined to 11.4% from 14.5% recorded the previous week. The yields on the government papers recorded mixed performance with the yields on the 182-day and 91-day papers increasing by 5.9 bps and 10.4 bps to 9.5% and 8.7%, respectively, while the yields on the 364-day paper declined by 1.3 bps to 9.9%. The government accepted a total of Kshs 19.7 bn worth of bids, translating to an acceptance rate of 99.9%.
In the Primary Bond Market, the Central Bank of Kenya released results for the recently re-opened bonds; FXD1/2022/03, FXD2/2019/10 and FXD1/2021/20 with effective tenors of 2.7 years, 6.7 years and 19.1 years and coupon rates of 11.8%, 12.3% and 13.4%, respectively. In line with our expectations, the bonds recorded an undersubscription of 98.3%, partly attributable to investors’ preference for the shorter dated papers as they sought to avoid duration risks and partly due to the tightened liquidity during the period of issue. The government issued the bonds seeking to raise Kshs 50.0 bn for budgetary support, received bids worth Kshs 49.1 bn and accepted bids worth Kshs 38.5 bn, translating to a 78.4% acceptance rate. The weighted average yields for the three bonds were 12.4% for FXD1/2022/03, 13.9% for FXD2/2019/10 and 14.0% for FXD1/2021/20.
In the money markets, 3-month bank placements ended the week at 7.7% (based on what we have been offered by various banks), while the yield on the 91-day T-bill increased by 10.4 bps to 8.7%. The average yield of the Top 5 Money Market Funds and the Cytonn Money Market Fund remained relatively unchanged at 9.7% and 10.6% respectively, as was recorded last week. The table below shows the Money Market Fund Yields for Kenyan Fund Managers as published on 19th August 2022:
Money Market Fund Yield for Fund Managers as published on 19th August 2022 |
||
Rank |
Fund Manager |
Effective Annual Rate |
1 |
Cytonn Money Market Fund |
10.6% |
2 |
Zimele Money Market Fund |
9.9% |
3 |
Sanlam Money Market Fund |
9.6% |
4 |
Old Mutual Money Market Fund |
9.3% |
5 |
Apollo Money Market Fund |
9.2% |
6 |
Nabo Africa Money Market Fund |
9.2% |
7 |
Dry Associates Money Market Fund |
9.2% |
8 |
Madison Money Market Fund |
9.1% |
9 |
NCBA Money Market Fund |
9.1% |
10 |
CIC Money Market Fund |
9.0% |
11 |
Co-op Money Market Fund |
8.9% |
12 |
GenCap Hela Imara Money Market Fund |
8.9% |
13 |
ICEA Lion Money Market Fund |
8.6% |
14 |
Orient Kasha Money Market Fund |
8.4% |
15 |
AA Kenya Shillings Fund |
7.7% |
16 |
British-American Money Market Fund |
7.4% |
Source: Business Daily
Liquidity:
During the week, liquidity in the money markets relatively eased, with the average interbank rate declining to 5.56% from 5.61% recorded the previous week, partly attributable to government payments that offset tax remittances. The average interbank volumes traded declined by 13.9% to Kshs 22.3 bn from Kshs 25.9 bn recorded the previous week.
Kenya Eurobonds:
During the week, the yields on all Eurobonds were on an upward trajectory, partly attributable to investors heightened perceived risks arising from increasing inflationary pressures and the persistent local currency depreciation. Yields on the 10-year Eurobond issued in 2014 recorded the highest increase of 2.8% points to 14.7% from 11.9%, recorded the previous week. The table below shows the summary of the performance of the Kenyan Eurobonds as of 18th August 2022;
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 |
3-Jan-22 |
4.4% |
8.1% |
8.1% |
5.6% |
6.7% |
6.6% |
29-Jul-22 |
16.2% |
14.9% |
13.3% |
16.3% |
14.0% |
13.3% |
12-Aug-22 |
11.9% |
11.8% |
11.2% |
12.5% |
11.5% |
10.2% |
15-Aug-22 |
12.2% |
12.1% |
11.3% |
12.6% |
11.7% |
10.3% |
16-Aug-22 |
14.6% |
12.4% |
11.7% |
13.3% |
12.3% |
10.8% |
17-Aug-22 |
14.8% |
12.5% |
11.7% |
13.7% |
12.4% |
10.9% |
18-Aug-22 |
14.7% |
12.8% |
11.9% |
14.1% |
12.6% |
10.8% |
Weekly Change |
2.8% |
1.0% |
0.7% |
1.6% |
1.1% |
0.6% |
MTD Change |
(1.5%) |
(2.1%) |
(1.4%) |
(2.2%) |
(1.4%) |
(2.5%) |
YTD Change |
10.3% |
4.7% |
3.8% |
8.5% |
5.9% |
4.2% |
Source: Central Bank of Kenya (CBK)
Kenya Shilling:
During the week, the Kenyan shilling continued to depreciate against the US dollar to close the week at Kshs 119.6, a 0.2% depreciation from Kshs 119.3 recorded the previous week, partly attributable to increased dollar demand from the oil and energy sectors against a slower supply of hard currency. On a year to date basis, the shilling has depreciated by 5.7% against the dollar, higher than the 3.6% depreciation recorded in 2021. We expect the shilling to remain under pressure in 2022 as a result of:
The shilling is however expected to be supported by:
Weekly Highlights:
During the week, the Energy and Petroleum Regulatory Authority (EPRA) released their monthly statement on the maximum retail fuel prices in Kenya effective 15th August 2022 to 14th September 2022. Notably, fuel prices remained unchanged at Kshs 159.1 per litre for Super Petrol, Kshs 140.0 per litre for Diesel and Kshs 127.9 per litre for Kerosene. The performance was attributable to:
The performance was despite;
Despite the performance, global fuel prices have remained high since the beginning of the year, having recorded a 26.1% year to date gain to USD 98.2 per barrel as of 18th August 2022, from USD 77.9 per barrel recorded on 3rd January 2022. The increase is mainly driven by persistent supply chain constraints against an increasing demand as economies continue to normalize. However, Kenyans have continued to get cushioned against the elevated fuel price, owing to the National Treasury's fuel subsidy program, which we believe is unsustainable given the continued increase in the landed cost of fuel. As such, we expect the government to gradually eliminate the programme and adjust the domestic fuel prices to ease the pressure on expenditure and consequently reduce the need for excessive borrowing. We also expect the cost of living to remain elevated given that fuel is a major contributor to Kenya’s headline inflation it’s a major input cost in majority of Kenya’s sectors such as manufacturing, transport and energy. Consequently, the business environment is expected to remain unfavourable because of a diminishing consumer purchasing power.
The National Treasury gazetted the revenue and net expenditures for the first month of FY’2022/2023, ending 29th July 2022. Below is a summary of the performance:
FY'2022/2023 Budget Outturn - As at 29th July 2022 |
|||||
Amounts in Kshs billions unless stated otherwise |
|||||
Item |
12-months Original Estimates |
Actual Receipts/Release |
Percentage Achieved |
Prorated |
% achieved of prorated |
Opening Balance |
0.6 |
||||
Tax Revenue |
2,071.9 |
130.6 |
6.3% |
172.7 |
75.6% |
Non-Tax Revenue |
69.7 |
1.9 |
2.8% |
5.8 |
33.6% |
Total Revenue |
2,141.6 |
133.2 |
6.2% |
178.5 |
74.6% |
External Loans & Grants |
349.3 |
27.9 |
8.0% |
29.1 |
95.7% |
Domestic Borrowings |
1,040.5 |
15.6 |
1.5% |
86.7 |
18.0% |
Other Domestic Financing |
13.2 |
2.8 |
21.0% |
1.1 |
251.5% |
Total Financing |
1,403.0 |
46.2 |
3.3% |
116.9 |
39.5% |
Recurrent Exchequer issues |
1,178.4 |
66.8 |
5.7% |
98.2 |
68.0% |
CFS Exchequer Issues |
1,571.8 |
89.5 |
5.7% |
131.0 |
68.4% |
Development Expenditure & Net Lending |
424.4 |
0.0 |
0.0% |
35.4 |
0.0% |
County Governments + Contingencies |
370.0 |
23.0 |
6.2% |
30.8 |
74.6% |
Total Expenditure |
3,544.6 |
179.3 |
5.1% |
295.4 |
60.7% |
Total Borrowing |
1,389.8 |
43.5 |
3.1% |
115.8 |
37.5% |
The Key take-outs from the release include;
As expected, the revenue performance for the first month of the FY’2022/2023 is not plausible mainly due to the economic uncertainties that emanated from the elevated inflationary pressures as well as the heated political environment. The slow-down in economic environment was evidenced by the decline in the July PMI to 46.3, from 46.8 in June 2022 and is expected to remain subdued in the short term as consumers continue to cut on spending. As such, we believe that the performance of revenue collection in the coming months will be largely determined by how soon the country’s business environment stabilizes and how fast the incoming regime implements its economic growth related initiatives. However, risks lie on the downside given the high global commodity prices which continue to weigh on the economy.
Rates in the Fixed Income market have remained relatively high due to the relatively heightened perceived risk by investors. As it is still early in the financial year, the government is 43.1% behind its prorated borrowing target of Kshs 79.9 bn having borrowed Kshs 45.5 bn of the Kshs 581.7 bn borrowing target for the FY’2022/2023. We expect sustained gradual economic recovery as evidenced by the revenue collections of Kshs 2.0 tn in the FY’2021/2022, equivalent to a 2.8% outperformance. Despite the performance, we believe that the projected budget deficit of 6.2% for the FY’2022/2023 is relatively ambitious given the downside risks and deteriorating business environment occasioned by high inflationary pressures. We however expect the support from the IMF and World Bank to finance some of the government projects and thus help maintain a stable interest rate environment since the government is not desperate for cash. 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 week, the equities market was on a downward trajectory with NASI, NSE 20 and NSE 25 declining by 0.4%, 1.1% and 1.0%, respectively, taking their YTD performance to losses of 12.4%, 7.1% and 9.9%, for NASI, NSE 20 and NSE 25, respectively. The equities market performance was mainly driven by losses recorded by large-cap stocks such as Equity Group, EABL, Co-operative Bank, NCBA Bank and BAT of 5.0%, 2.2%, 1.6%, 1.5% and 1.0%, respectively. The losses were however mitigated by gains recorded by stocks such as ABSA, Bamburi, KCB Group and Safaricom of 2.9%, 2.1%, 0.5% and 0.3% respectively.
During the week, equities turnover declined by 1.2% to USD 9.0 mn, from USD 9.1 mn recorded the previous week, taking the YTD turnover to USD 565.3 mn. Additionally, foreign investors turned net buyers, with a net buying position of USD 0.2 mn, from a net selling position of USD 4.1 mn recorded the previous week, taking the YTD net selling position to USD 139.2 mn.
The market is currently trading at a price to earnings ratio (P/E) of 7.7x, 39.2% below the historical average of 12.7x, and a dividend yield of 5.6%, 1.5% points above the historical average of 4.1%. Key to note, NASI’s PEG ratio currently stands at 1.0x, an indication that the market is fairly valued relative to its future growth. A PEG ratio greater than 1.0x indicates the market may be 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:
Weekly Highlight:
Earnings Release
During the week, the Standard Chartered Bank of Kenya Plc, Stanbic Holdings and I&M Holdings released their H1’2022 financial results. Below is a summary of their performance;
Balance Sheet Items (Kshs bn) |
H1’2021 |
H1’2022 |
y/y change |
Net loans |
130.3 |
128.5 |
(1.3%) |
Government Securities |
101.4 |
103.6 |
2.1% |
Total Assets |
345.6 |
364.3 |
5.4% |
Customer Deposits |
278.2 |
286.9 |
3.1% |
Deposits per Branch |
11.1 |
13.0 |
17.2% |
Total Liabilities |
293.9 |
307.9 |
4.7% |
Shareholder's Funds |
51.7 |
56.4 |
9.1% |
Balance sheet ratios |
H1'2021 |
H1'2022 |
y/y change |
Loan to Deposit Ratio |
46.8% |
44.8% |
(2.0%) |
Return on average equity |
13.7% |
17.7% |
4.0% |
Return on average assets |
2.1% |
2.7% |
0.6% |
Income Statement (Kshs bn) |
H1'2021 |
H1'2022 |
y/y change |
Net Interest Income |
9.1 |
10.0 |
9.9% |
Net non-Interest Income |
5.0 |
5.5 |
10.9% |
Total Operating income |
14.1 |
15.6 |
10.2% |
Loan Loss provision |
0.6 |
0.1 |
(83.1%) |
Total Operating expenses |
7.3 |
8.0 |
9.2% |
Profit before tax |
6.8 |
7.6 |
11.4% |
Profit after tax |
4.9 |
5.4 |
10.9% |
Core EPS |
12.9 |
14.3 |
10.9% |
Income Statement Ratios |
H1'2021 |
H1'2022 |
y/y change |
Yield from interest-earning assets |
7.7% |
7.3% |
(0.4%) |
Cost of funding |
1.5% |
1.1% |
(0.4%) |
Net Interest Spread |
6.3% |
6.3% |
0.0% |
Net Interest Margin |
6.4% |
6.4% |
0.0% |
Cost of Risk |
4.5% |
0.7% |
(3.8%) |
Net Interest Income as % of operating income |
64.6% |
64.4% |
(0.2%) |
Non-Funded Income as a % of operating income |
35.0% |
36.0% |
1.0% |
Cost to Income Ratio |
51.8% |
51.3% |
(0.5%) |
Cost to Income Ratio without LLP |
47.3% |
50.6% |
3.3% |
Cost to Assets |
2.0% |
2.2% |
0.2% |
Capital Adequacy Ratios |
H1'2021 |
H1'2022 |
% Change |
Core Capital/Total Liabilities |
15.1% |
14.6% |
(0.6%) |
Minimum Statutory ratio |
8.0% |
8.0% |
0.0% |
Excess |
7.1% |
6.6% |
(0.6%) |
Core Capital/Total Risk Weighted Assets |
15.9% |
15.4% |
(0.5%) |
Minimum Statutory ratio |
10.5% |
10.5% |
0.0% |
Excess |
5.4% |
4.9% |
(0.5%) |
Total Capital/Total Risk Weighted Assets |
18.3% |
17.7% |
(0.5%) |
Minimum Statutory ratio |
14.5% |
14.5% |
0.0% |
Excess |
3.8% |
3.2% |
(0.5%) |
Liquidity Ratio |
70.1% |
73.6% |
3.6% |
Minimum Statutory ratio |
20.0% |
20.0% |
0.0% |
Excess |
50.1% |
53.6% |
3.6% |
Adjusted Core Capital/Total Liabilities |
15.2% |
14.6% |
(0.6%) |
Adjusted Core Capital/Total RWA |
15.9% |
15.5% |
(0.4%) |
Adjusted Total Capital/Total RWA |
18.3% |
17.8% |
(0.5%) |
Key take-outs from the earnings release include;
For a comprehensive analysis, please see our Standard Chartered Bank of Kenya Plc’s H1’2022 Earnings Note
Balance Sheet |
H1'2021 |
H1'2022 |
y/y change |
Net Loans |
207.6 |
244.0 |
17.5% |
Total Assets |
329.5 |
341.6 |
3.7% |
Deposits |
260.0 |
258.2 |
(0.7%) |
Liabilities |
276.0 |
283.4 |
2.7% |
Shareholders' Funds |
53.5 |
58.2 |
8.8% |
Balance sheet ratios |
H1'2021 |
H1'2022 |
% point change |
Loan to Deposit ratio |
79.9% |
94.5% |
14.6% |
Return on average equity |
17.6% |
20.1% |
2.5% |
Return on average assets |
2.8% |
3.3% |
0.5% |
Income Statement (Kshs bns) |
H1'2021 |
H1'2022 |
y/y change |
Net interest Income |
6.9 |
8.3 |
20.9% |
Net non-interest income |
5.5 |
6.9 |
25.1% |
Total Operating income |
12.4 |
15.2 |
22.8% |
Loan loss provision |
(1.5) |
(1.3) |
(16.1%) |
Total Operating expenses |
(7.6) |
(8.6) |
13.7% |
Profit before tax |
4.8 |
6.6 |
37.1% |
Profit after tax |
3.5 |
4.8 |
36.9% |
Income Statement Ratios |
H1'2021 |
H1'2022 |
y/y change |
Yield from interest-earning assets |
3.2% |
3.8% |
0.6% |
Cost of funding |
2.6% |
2.3% |
(0.3%) |
Net Interest Margin |
4.4% |
5.4% |
1.0% |
Net Interest Income as % of operating income |
55.7% |
54.9% |
(0.8%) |
Non-Funded Income as a % of operating income |
44.3% |
45.1% |
0.8% |
Cost to Income Ratio |
48.9% |
48.2% |
(0.7%) |
Cost to Income Ratio without LLP |
36.8% |
40.0% |
3.2% |
Capital Adequacy Ratios |
H1’2021 |
H1’2022 |
Core Capital/Total Liabilities |
18.2% |
18.1% |
Minimum Statutory ratio |
8.0% |
8.0% |
Excess |
10.2% |
10.1% |
Core Capital/Total Risk Weighted Assets |
16.1% |
14.0% |
Minimum Statutory ratio |
10.5% |
10.5% |
Excess |
5.6% |
3.5% |
Total Capital/Total Risk Weighted Assets |
18.1% |
16.2% |
Minimum Statutory ratio |
14.5% |
14.5% |
Excess |
3.6% |
1.7% |
Liquidity Ratio |
53.3% |
35.9% |
Minimum Statutory ratio |
20.0% |
20.0% |
Excess |
33.3% |
15.9% |
Adjusted Core Capital/Total Deposit Liabilities |
18.4% |
18.1% |
Adjusted Core Capital/Total Risk Weighted Assets |
15.9% |
14.0% |
Adjusted Total Capital/Total Risk Weighted Assets |
18.0% |
16.2% |
Key take-outs from the earnings release include;
For a comprehensive analysis, please see our Stanbic Holdings’ H1’2022 Earnings Note
Balance Sheet Items |
H1'2021 |
H1'2022 |
y/y change |
Government Securities |
103.5 |
121.4 |
17.2% |
Net Loans and Advances |
204.5 |
231.1 |
13.0% |
Total Assets |
382.6 |
439.7 |
14.9% |
Customer Deposits |
276.8 |
313.2 |
13.2% |
Total Liabilities |
312.5 |
368.2 |
17.8% |
Shareholders’ Funds |
65.9 |
66.5 |
1.0% |
Balance Sheet Ratios |
H1'2021 |
H1'2022 |
% y/y change |
Loan to Deposit Ratio |
73.9% |
73.8% |
(0.1%) |
Return on average equity |
14.5% |
13.3% |
(1.3%) |
Return on average assets |
2.5% |
2.1% |
(0.4%) |
Income Statement |
H1'2021 |
H1'2022 |
y/y change |
Net Interest Income |
8.9 |
10.5 |
18.7% |
Net non-Interest Income |
3.9 |
5.1 |
28.2% |
Total Operating income |
12.8 |
15.6 |
21.6% |
Loan Loss provision |
1.1 |
1.3 |
24.4% |
Total Operating expenses |
7.2 |
8.6 |
19.3% |
Profit before tax |
5.9 |
7.2 |
22.5% |
Profit after tax |
4.2 |
4.9 |
15.9% |
Core EPS |
2.6 |
3.0 |
15.9% |
Income Statement Ratios |
H1'2021 |
H1'2022 |
y/y change |
Yield from interest-earning assets |
9.5% |
10.2% |
0.7% |
Cost of funding |
4.1% |
4.0% |
(0.1%) |
Net Interest Margin |
5.7% |
6.4% |
0.7% |
Net Interest Income as % of operating income |
69.2% |
67.5% |
(1.7%) |
Non-Funded Income as a % of operating income |
30.8% |
32.5% |
1.7% |
Cost to Income Ratio with LLP |
56.3% |
55.2% |
(1.1%) |
Cost to Income Ratio without LLP |
48.1% |
46.8% |
(1.3%) |
Cost to Assets |
1.6% |
1.7% |
0.1% |
Capital Adequacy Ratios |
H1'2021 |
H1'2022 |
% Points Change |
Core Capital/Total Liabilities |
20.7% |
19.9% |
(0.8%) |
Minimum Statutory ratio |
8.0% |
8.0% |
0.0% |
Excess |
12.7% |
11.9% |
(0.8%) |
Core Capital/Total Risk Weighted Assets |
15.9% |
15.0% |
(0.9%) |
Minimum Statutory ratio |
10.5% |
10.5% |
0.0% |
Excess |
5.4% |
4.5% |
(0.9%) |
Total Capital/Total Risk Weighted Assets |
20.7% |
19.8% |
(0.9%) |
Minimum Statutory ratio |
14.5% |
14.5% |
0.0% |
Excess |
6.2% |
5.3% |
(0.9%) |
Liquidity Ratio |
48.3% |
48.8% |
0.5% |
Minimum Statutory ratio |
20.0% |
20.0% |
0.0% |
Excess |
28.3% |
28.8% |
0.5% |
Adjusted Core Capital/Total Liabilities |
20.8% |
20.0% |
(0.8%) |
Adjusted Core Capital/Total RWA |
15.9% |
15.1% |
(0.9%) |
Adjusted Total Capital/Total RWA |
20.8% |
19.8% |
(0.9%) |
Key take-outs from the earnings release include;
For a comprehensive analysis, please see our I&M Holdings Plc' H1’2022 Earnings Note
Asset Quality
The table below is a summary of the asset quality for the listed banks
|
H1'2021 NPL Ratio** |
H1'2022 NPL Ratio* |
H1'2021 NPL Coverage** |
H1'2022 NPL Coverage* |
% point change in NPL Ratio |
% point change in NPL Coverage |
I&M Holdings |
10.4% |
9.4% |
67.2% |
59.2% |
(1.0%) |
(8.0%) |
Stanbic Bank |
9.5% |
10.4% |
51.2% |
56.0% |
0.9% |
4.8% |
Standard Chartered Bank Kenya |
15.4% |
15.4% |
81.4% |
83.9% |
0.0% |
2.5% |
Mkt Weighted Average |
12.1% |
12.2% |
67.3% |
68.0% |
0.1% |
0.8% |
*Market cap weighted as at 19/8/2022 |
Key take-outs from the table include;
Summary Performance
The table below highlights the performance of the listed banks, showing the performance using several metrics, and the key take-outs of the performance;
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 |
Stanbic Holdings |
36.9% |
14.8% |
(2.2%) |
20.9% |
5.4% |
25.1% |
45.1% |
11.1% |
(0.7%) |
(36.1%) |
94.5% |
17.5% |
20.1% |
I&M Holdings |
15.9% |
19.3% |
20.2% |
18.7% |
0.7% |
28.2% |
32.5% |
30.1% |
13.2% |
17.2% |
73.8% |
13.0% |
13.3% |
Standard Chartered |
10.9% |
4.4% |
(21.4%) |
9.9% |
6.4% |
10.9% |
35.6% |
(6.2%) |
3.1% |
2.1% |
44.8% |
(1.3%) |
17.7% |
H1'22 Mkt Weighted Average* |
21.3% |
11.7% |
(4.5%) |
15.9% |
4.7% |
20.1% |
38.2% |
8.7% |
4.2% |
(7.8%) |
69.5% |
8.8% |
17.5% |
H1'21 Mkt Weighted Average** |
136.0% |
15.0% |
10.8% |
17.6% |
7.4% |
19.2% |
35.6% |
16.6% |
18.4% |
12.4% |
68.8% |
11.7% |
16.9% |
*Market cap weighted as at 19/09/2022 |
|||||||||||||
**Market cap weighted as at 09/09/2021 |
Key takeaways from the table above include:
Universe of coverage:
Company |
Price as at 05/08/2022 |
Price as at 12/08/2022 |
w/w change |
YTD Change |
Target Price* |
Dividend Yield |
Upside/ Downside** |
P/TBv Multiple |
Recommendation |
Jubilee Holdings |
252.5 |
252.3 |
(0.1%) |
(20.4%) |
379.4 |
5.6% |
56.0% |
0.5x |
Buy |
Kenya Reinsurance |
2.1 |
2.2 |
3.3% |
(5.7%) |
3.2 |
4.6% |
51.8% |
0.2x |
Buy |
I&M Group*** |
17.0 |
17.0 |
(0.3%) |
(20.8%) |
22.3 |
8.8% |
40.4% |
0.5x |
Buy |
Sanlam |
11.7 |
11.7 |
0.0% |
0.9% |
15.9 |
0.0% |
36.5% |
1.2x |
Buy |
Diamond Trust Bank*** |
50.8 |
50.3 |
(1.0%) |
(15.5%) |
62.4 |
6.0% |
30.1% |
0.2x |
Buy |
KCB Group*** |
43.1 |
43.3 |
0.5% |
(5.0%) |
52.2 |
6.9% |
27.6% |
0.9x |
Buy |
Britam |
6.3 |
6.1 |
(2.5%) |
(19.0%) |
7.7 |
0.0% |
25.8% |
1.0x |
Buy |
NCBA*** |
26.2 |
25.8 |
(1.5%) |
1.4% |
29.1 |
11.6% |
24.4% |
0.6x |
Buy |
Stanbic Holdings |
98.8 |
99.0 |
0.3% |
13.8% |
109.8 |
9.1% |
20.0% |
0.9x |
Buy |
Co-op Bank*** |
12.8 |
12.6 |
(1.6%) |
(3.1%) |
14.1 |
7.9% |
19.8% |
0.9x |
Accumulate |
Equity Group*** |
50.5 |
48.0 |
(5.0%) |
(9.0%) |
54.4 |
6.3% |
19.6% |
1.2x |
Accumulate |
ABSA Bank*** |
12.0 |
12.4 |
2.9% |
5.1% |
13.6 |
8.9% |
19.0% |
1.2x |
Accumulate |
Standard Chartered*** |
139.3 |
138.3 |
(0.7%) |
6.3% |
137.0 |
10.1% |
9.2% |
1.1x |
Hold |
Liberty Holdings |
6.0 |
7.2 |
20.0% |
2.0% |
7.8 |
0.0% |
8.3% |
0.5x |
Hold |
CIC Group |
2.0 |
2.1 |
2.5% |
(5.5%) |
2.1 |
0.0% |
2.4% |
0.7x |
Lighten |
HF Group |
3.5 |
3.6 |
2.9% |
(5.3%) |
2.8 |
0.0% |
(22.2%) |
0.2x |
Sell |
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 fair value to its future growth (PEG Ratio at 1.0x), 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, the upcoming Kenyan general elections and the slow vaccine rollout to continue weighing down the economic outlook in the short term.
During the week, EA Limited, a subsidiary of the TransCentury PLC, an African infrastructure investment company based in Nairobi Kenya, announced plans to develop an affordable housing project worth USD 250.0 mn (Kshs 29.8 bn) in the Democratic Republic of Congo (DRC). The project targets the Office Conglais De Controle (OCC) staff (a quality assurance body) and will consist of 5,000 units to be constructed over a period of five years starting in 2022. Notably, EA limited will be the Engineering, Procurement and Construction (EPC) contractor as per the signed Memorandum of Understanding (MOU) with Symbion Architect, making the treaty the first to be initiated since DRC joined the East African Community bloc in March 2022. EA’s decision to invest in DRC was mainly driven by;
In our view, EA’s expansion move will see the TransCentury group further increase its asset base and footprint in the East African region. EA is expected to benefit from DRC’s viable housing market which is primarily driven by impressive demographics resulting to a rapid demand for dwelling units that surpasses the current supply. Moreover, the move by EA is expected to boost investment confidence in the region which has been witnessing improved activities and developments in various sectors with the most recent focus mainly on the banking sector.
In the Nairobi Stock Exchange, ILAM Fahari I - REIT closed the week trading at an average price of Kshs 7.14 per share. The performance represents a 0.6% and 11.6% Week-to-Date (WTD) and Year-to-Date (YTD) increase, respectively, from Kshs 7.10 and Kshs 6.4 per share, respectively. On an Inception-to-Date (ITD) basis, the REIT’s performance continues to be weighed down having recorded a 64.3% decline from Kshs 20.0. The graph below shows Fahari I-REIT’s performance from November 2015 to August 2022:
The increasing investor confidence in the East African property market is expected to drive the developments and performance of the Real Estate sector. However, investor’s minimal appetite for the Kenyan REIT instrument is expected to continue weighing down the overall investments in REITs.
Kenya, like many other countries world over, has faced unprecedented challenges in the recent years which has had a major setback on the economy. One major issue; supply chain bottlenecks remains apparent and continues to worsen with new challenges such as geopolitical pressures and anticipation of increased demand as economies recover. Where we stand, the country is dealing with several issues including a high cost of living stemming from the prevailing inflationary pressures and local currency depreciation, rising debt levels currently at 69.1% of GDP as of May 2022 and a deteriorating business environment as consumers continue to cut back on spending. As such, we expect the incoming government to roll up its sleeves, perform a balancing act, and devise ways to stabilize key macroeconomic indicators while also supporting the ongoing economic recovery.
We recently covered a topical on the “Effects of Elections on the Investment Environment in Kenya” where we concluded that economic development and investment performance are heavily reliant on continuity and a stable macroeconomic environment, both of which have a significant impact on investor sentiment. We expected the out-going government to ensure a peaceful transition as well as provide the incoming government ample ground to implement its manifesto and improve the country’s economic prospects. This week we look at what has been happening under the outgoing government and discuss some of the economic areas to be focused on by the next government, now that the elections are over. The analysis will be broken down as follows:
Section I: Introduction
The Kenyan economy has continued to record steady recovery, with the GDP having grown by 6.8% in Q1’2022, up from the 2.7% growth recorded in Q1’2021, mainly driven by the resumption of most economic activities following the lifting of all COVID-19 related measures. Despite the recovery, the country’s general business environment has continued to deteriorate majorly due to persistent inflationary pressures, that have led to reduced consumer spending. The Purchasing Manager’s Index (PMI), which measures business activity came in at an average of 48.8 for the first seven months of 2022, indicating a deteriorating business environment in Kenya’s private sector. The chart below summarizes the evolution of the PMI in the last five years;
*** Key to note, a reading above 50.0 signals an improvement in business conditions, while readings below 50.0 indicate a deterioration.
Section II: Background and overview of the topic
Every new government seeks to implement its manifesto with the aim of improving the country’s economic conditions as well as address the key economic issues affecting the citizens. In this section, we examine Jubilee's achievements and failures, with a particular emphasis on the major macro-economic indicators that shape a country’s economic prospects, as follows;
Over the last ten years, the Kenyan economy has recorded relative growth with the average GDP growth rate coming in at 4.4%, primarily driven by robust domestic demand emanating from private consumption and continuous increase in government investment. However, the growth has been weighed down by external shocks such as elevated inflationary pressures and the Covid-19 pandemic in 2020 which resulted in extreme economic disruptions. The graph below shows the GDP growth rates since 2012:
Source: World Bank
The Kenyan economy recorded the highest growth rate in 2021, having expanded by 7.5%, up from the 0.3% contraction recorded in 2020, mainly driven by the resumption of most economic activities following the lifting of most COVID-19 related measures. However, Kenya’s 10-year average GDP growth lags behind most of the African countries as shown in the chart below;
Source: World Bank
Over the last ten years, Kenya’s public debt has grown at a CAGR of 18.2% to Kshs 8.6 tn in May 2022, from Kshs 1.7 tn in May 2012 in comparison to the 4.4% average GDP growth an indication that the increase in debt is not translating into GDP growth. The increase in debt stock has been partly driven by huge spending on large infrastructure projects as well as widening fiscal deficit which stood at 8.1% of GDP in FY’2021/2022. Over the 10-year period that Jubilee has been in government, Kenya’s debt to GDP ratio increased to 67.5% in 2021, 26.3% points higher than the 41.2% ratio recorded in 2012 and 17.5% points above the IMF’s recommended threshold of 50.0% for developing countries. The chart below highlights the trend in the country’s debt to GDP ratio over the last ten years:
Source: The National Treasury, *Projected figures
It is worth noting that Kenya’s debt servicing costs have continued to increase over time growing at a 10-year CAGR of 23.0% to Kshs 780.6 bn in FY’2020/2021, from Kshs 98.6 bn in FY’2010/2011The debt service to revenue ratio has also increased significantly in the ten years to 50.0%, from 16.2% in FY’2010/2011 posing a refinancing risk given the existing external shocks that further increase the servicing costs. This is also an indication that a larger percentage of the revenues collected will be used to pay back debt as opposed to steering economic development. Below is a chart showing the debt service to revenue ratio for the last ten fiscal years;
Source: National Treasury
Ove the 10-year period, the Kenyan shilling has depreciated by 42.7% to an all-time low of Kshs 119.3 in August 2022 from Kshs 83.6 over the same period in 2012, attributable to various factors such as increasing debt levels, an ever present current account deficit and the rising prices of commodities such as crude oil prices as Kenya remains a net importer. The economic disruptions occasioned by the COVID-19 pandemic in 2020 also caused volatility of the shilling leading to a depreciation of 7.7% in 2020 and a further 3.6% in 2021. On a YTD basis, the shilling has depreciated by 5.7% against the USD, to close at Kshs 119.6, from Kshs 113.1 recorded on 3rd January 2022. The steep depreciation in 2022 is mainly attributable to increased dollar demand from commodity and energy sector importers as a result of the high global crude oil prices occasioned by supply chain constraints worsened by the geopolitical pressures at a time when the economy has continued to witness increasing demand. The chart below illustrates the performance of the Kshs against the USD over the last 10 years:
Source: Central Bank of Kenya
Over the 10-year period that Jubilee has been in government, Kenya’s revenue collection more than doubled to grow at a 10-year CAGR of 8.9% to Kshs 2.0 tn in FY’2021/2022, from Kshs 0.9 tn in FY’2012/2013 following expansion of the tax base as well as implementation of tax measures that have aided in efficient collection of tax revenues. However, the government has only surpassed its revenue collection target twice in the ten years under review. The graph below shows a summary of Kenya’s revenue performance over the last 10 years:
Source: Kenya Revenue Authority
According to the World Bank, unemployment rate in Kenya recorded a 2.9% points increase during the period under review to 5.7% in 2021, from 2.8% in 2012 manly attributable to the challenges facing the county’s economic development coupled the rising youth population in Kenya, whose unemployment rate stood at 13.8% in 2021. The chart below shows a summary of total and youth unemployment over the last 10 years:
Source: World Bank
The total labor force increased by 33.3% to 25.0 mn people in 2021 from 18.7 mn people in 2012 as many people continue to acquire the relevant skills needed in the job market. Additionally, the employment to population ratio declined to 69.0% in 2021 from 71.8% in 2012 as the country continues to recorded rapid population growth to close 2021 at 55.0 mn people, from 44.3 mn in 2012. The graph below shows a summary of total labor force verses employment to population ratio over the last 10 years:
Source: World Bank
Over the last 10 years, the Kenyan infrastructural sector has witnessed rapid developments aimed at improving connectivity and the economic performance. This has been supported by governments’ aggressiveness in implementing projects through various strategies such as; Public-Private Partnerships (PPPs) and Joint Ventures(JVs), floating of infrastructure bonds in order to raise construction funds, and, high priority in the budget allocations. As such, the government allocated to the sector a total of Kshs 3.7 tn in the last ten financial years, representing an average of 16.7% of the total budget with the highest allocation at 29.7% of the total budget in FY’2015/2016. However, the allocation has been on a downward trajectory, an indication that we are not investing much into the future. The graph below shows the budget allocation to the infrastructure sector over last ten financial years:
Source: The National Treasury
Section III: Key focus area for the next government
In light of the above, we expect the incoming government to implement its manifesto bearing in mind the key areas that need immediate and full attention to ensure that the country does not lag behind or suffer the consequences of delayed action. The following are the key economic areas we expect the incoming government to focus on, in a bid to steer development:
The Kenya’s economy is projected to grow at a rate of 5.5% and 5.0% in 2022 and 2023 respectively, which are lower rates than the 7.5% growth recorded in 2021 amid the continued rise in global fuel prices which have adverse effects on input cost for major sectors such as manufacturing, transport and energy. To support the growth, we expect the new government to;
The country’s debt stock stood at Kshs 8.6 tn as of May 2022, equivalent to 69.1% of GDP and 19.1% points above the IMF recommended threshold of 50.0% for developing nations. Given the high debt levels as well as the ever present fiscal deficit, we expect the incoming government to work on strategies to reduce the over-reliance on debt by;
The Kenya shilling has remained under pressure as a result of increased dollar demand from the oil and energy sectors as well as general importers given that Kenya is predominantly a net importer. Despite the fact that the current pressure on the Kenyan shilling is unlikely to abate in the near term, there are actionable steps that can be taken by the incoming Government to mitigate further depreciation of the shilling. These include;
The private sector continues to provide employment opportunities in the country as well as provide more sources for revenue collection. The government can support the sector by making credit more accessible and providing a business-friendly environment. Below are some of the initiatives that the government can adopt to support private sector growth;
Conclusion
We applaud the Jubilee government for the various accomplishments it has made over the last ten years, with emphasis on infrastructural development, steady economic growth, and increased revenue collection. However, we note that the incoming government has a significant role to play in stabilizing the country’s debt sustainability levels as well as lowering the elevated cost of living. Additionally, the increasing debt levels pose a risk of debt distress as the country continues to face unprecedented external shocks. In our view, the incoming government has limited choices but to focus on ways to boost economic growth, in a bid to reduce the over reliance on debt which stands out as the most critical issue for the country. However, the government will still be faced by various challenges such as the persistent supply chain bottlenecks, high debt servicing costs and the resurgence of COVID-19 infections which continue to disrupt the country’s and its trading partner’s economies.
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.