By Cytonn Research, Mar 7, 2021
During the week, T-bills recorded an oversubscription, with the overall subscription rate coming in at 141.0% up from 132.0% recorded the previous week due to increased liquidity in the money markets. The highest subscription rate was in the 364-day paper, which increased to 190.2%, from 151.6% recorded the previous week. The subscription for the 91-day paper also increased to 176.1%, from 157.0% recorded the previous week, while the 182-day paper’s subscription rate declined to 77.7%, from 102.3% recorded the previous week. In the primary bond auction, the government is seeking to raise Kshs 50.0 bn for budgetary support by reopening two bonds, FXD1/2019/10 and FXD2/2018/20, with a time to maturity of 8.0 and 17.4 years, respectively. The bonds have coupons of 12.4% and 13.2% and are currently trading at a yield of 12.0% and 13.0%, respectively in the secondary market;
Stanbic Bank released the Monthly Purchasing Managers’ Index (PMI) for February 2021, which came in at 50.9, a decline from the 53.2 recorded in January 2021, which was the lowest that has been reported over the last eight months. The decline can be attributed to low cash flows in the economy and the increased costs fuels in addition to the VAT Adjustments that happened in January;
The Budget and Appropriation Committee (BAC) presented the report on the Budget Policy Statement (BPS) and the Medium Term Debt Strategy (MTDS) for the 2021/2022 Financial Year to parliament. The BAC report was approved by the National Assembly and some of the notable approvals include: (i) the fiscal deficit was set at the lower of 7.5% of the country’s GDP or Kshs 930.0 bn, (ii) the revenue collections was set to be not less than Kshs 2.0 tn, and, (iii) the approved foreign and domestic debt mix of 43:57 translating to total borrowings for the next financial year at Kshs 530.0 bn foreign debt and Kshs 399.9 bn domestic borrowing;
During the week, the equities market recorded mixed performance, with NSE 20 gaining by 1.3%, while NASI and NSE 25 declined by 2.2% and 1.0% respectively, taking their YTD performance to gains of 6.3%, 5.2% and 3.7% for NASI, NSE 25 and NSE 20 respectively. The equities market performance was driven by gains recorded by large-cap stocks such as NCBA, Diamond Trust Bank (DTB-K), and EABL of 5.7%, 3.6%, and 1.8%, respectively. The gains were however weighed down by losses recorded by stocks such as Bamburi, Safaricom and BAT, which declined by 3.9%, 3.7% and 1.8%, respectively. During the week, Equity Group Holdings Plc signed a Kshs 16.5 bn (€125.0 mn) loan facility with the European Investment Bank (EIB) and the European Commission for onward lending to Micro Small and Medium-sized Enterprises (MSMEs). Additionally, during the week, Stanbic Holdings released their FY’2020 financial results highlighting an 18.6% decline in their Core earnings per share to Kshs 13.1, from Kshs 16.1 in FY’2019;
During the week, Acorn Holdings, a real estate developer announced that InfraCo, a United Kingdom funded private infrastructure development group has invested Kshs 1.0 bn to the firm’s real estate investment trust (REIT) intended to support the construction of 10,000 affordable student accommodation units in Nairobi;
According to the Kenya National Bureau of Statistics (KNBS) FinAccess Report 2019, pensions industry has witnessed significant growth with the number of registered members growing by a 10-year CAGR of 15.7% to 3.0 mn members in 2019, from 0.7 mn registered members in 2009. Additionally, Assets Under Management have grown by a 10-year CAGR of 15.8% to Kshs 1.3 tn as of December 2019, from Kshs 0.3 tn in 2009. This growth has been attributed to the mass education drives on the importance of retirement savings by the Retirement Benefits Authority and the industry players. This week we shall review the overall performance of the pensions schemes over time with a key focus on the year 2020;
Money Markets, T-Bills & T-Bonds Primary Auction:
During the week, T-bills recorded an oversubscription, with the overall subscription rate coming in at 141.0% up from 132.0% recorded the previous week due to the increased liquidity in the money markets as a result of government payments. The highest subscription rate was in the 364-day paper, which increased to 190.2%, from 151.6% recorded the previous week. The increased appetite for the 364-day paper is mainly attributable to growing investor preference for medium-term papers as investors now believe the pandemic has been contained but are still worried about the possible effects of the current rising political temperatures preceding the elections in August 2022. The subscription for the 91-day paper also increased to 176.1%, from 157.0% recorded the previous week, while the 182-day paper’s subscription rate declined to 77.7%, from 102.3% recorded the previous week. The yields on 364-day, 182-day, and 91-day papers rose by 5.7 bps, 4.3 bps, and 9.3 bps to 9.1%, 7.8%, and 7.0%, respectively, as investors sought higher yields as the government’s demand for cash remained high. The government accepted 89.2% of bids received, amounting to Kshs 30.2 bn, out of the Kshs 33.8 bn worth of bids received.
In the primary bonds auction, the government is seeking to raise Kshs 50.0 bn for budgetary support by reopening two bonds, FXD1/2019/10 and FXD2/2018/20, with effective tenures of 8.0 and 17.4 years, respectively. The bonds have coupons of 12.4% and 13.2% and are currently trading at a yield of 12.0% and 13.0%, respectively in the secondary market. Given the tightening liquidity in the market coupled with the under subscription recorded in last month’s issues, we anticipate an under a subscription and a high acceptance rate. The bonds will be on offer from 01/03/2021 to 09/03/2021 and we recommend a bidding range of 12.4%-12.5% for FXD1/2019/10 and 13.4%-13.5% for FXD2/2019/20.
In the money markets, 3-month bank placements ended the week at 7.9% (based on what we have been offered by various banks), while the yield on the 91-day T-bill increased by 9.3 bps to 7.0%. The average yield of the Top 5 Money Market Funds remained unchanged at 10.0% from last week. The yield on the Cytonn Money Market increased marginally by 0.1% points to come in at 10.9%, from 10.8% recorded the previous week.
Liquidity:
During the week, liquidity in the money market tightened, with the average interbank rate increasing to 4.9% from 4.2% recorded the previous week, as the government payments were offset by tax remittances. The average interbank volumes declined by 24.7% to Kshs 11.6 bn, from Kshs 15.3 bn recorded the previous week. According to the Central Bank of Kenya’s weekly bulletin released on 5th March 2021, commercial banks’ excess reserves came in at Kshs 13.5 bn in relation to the 4.25% Cash Reserve Ratio.
Eurobonds performance:
During the week, the yields on Eurobonds were on a downward trajectory. According to the Central Bank bulletin, the yields on the 10-year Eurobond issued in June 2014, the 10-year and 30-year Eurobonds issued in 2018, and the 7-year and 12-year Eurobonds issued in 2019 all declined by 0.1% points to 3.2%, 5.3%, 7.3%, 4.6%, and 6.3% respectively, from 3.3%, 5.4%, 7.4%, 4.7%, and 6.4%.
Kenya Eurobond Performance |
|||||
|
2014 |
2018 |
2019 |
||
Date |
10-year issue |
10-year issue |
30-year issue |
7-year issue |
12-year issue |
31-Dec-2020 |
3.9% |
5.2% |
7.0% |
4.9% |
5.9% |
29-Jan-2021 |
3.6% |
5.3% |
7.2% |
4.8% |
6.1% |
26-Feb-2021 |
3.3% |
5.4% |
7.4% |
4.7% |
6.4% |
01-Mar-2021 |
3.3% |
5.3% |
7.3% |
4.6% |
6.3% |
02-Mar-2021 |
3.1% |
5.3% |
7.3% |
4.6% |
6.3% |
03-Mar-2021 |
3.1% |
5.3% |
7.3% |
4.6% |
6.2% |
04-Mar-2021 |
3.2% |
5.3% |
7.3% |
4.6% |
6.3% |
Weekly Change |
(0.1%) |
(0.1%) |
(0.1%) |
(0.1%) |
(0.1%) |
Monthly Change |
(0.4%) |
(0.0%) |
0.1% |
(0.2%) |
0.2% |
YTD Change |
(0.7%) |
0.1% |
0.3% |
(0.3%) |
0.4% |
Source: CBK Bulletin
Kenya Shilling:
During the week, the Kenyan shilling appreciated by 0.3% against the US dollar to Kshs 109.7, from Kshs 109.8 recorded the previous week. This was mainly attributable to market participants anticipating a positive economic recovery from the coronavirus crisis coupled with the arrival of vaccines in the country during the week. On a YTD basis, the shilling has depreciated by 0.4% against the dollar, in comparison to the 7.7% depreciation recorded in 2020. We expect continued pressure on the Kenyan shilling due to:
However, in the short term, the shilling is expected to be supported by:
Weekly Highlights:
A: The Monthly Purchasing Managers’ Index (PMI)
During the week, Stanbic Bank released the Monthly Purchasing Managers’ Index (PMI) for February 2021, which came in at 50.9, a decline from the 53.2 recorded in January 2021, attributable to marginal growth in output, the modest increase in new order volumes and weak cash flow which limited household and client spending. Key to note, readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 indicate a deterioration. This was the first decline recorded after an eight-month run of consecutive growth, following the initial impact of the COVID-19 outbreak. Slower sales were attributed to cash flow constraints in some sectors of the economy, leading to reduced customer spending and travel. New orders from foreign clients recorded modest growth, experiencing the lowest growth since June 2020. Employment numbers increased albeit marginally in February while some businesses cut workers’ salaries to maintain current staff levels, leading to the fastest drop in average wage costs in seven months. Cost burdens were driven higher by a sharp increase in purchase prices, attributable to the recent hike in VAT, material shortages, and increased fuel prices. In line with the decline in some of the leading economic indicators, we maintain a cautious outlook in the short term owing to the increasing inflation levels in the country coupled with an increase in COVID-19 infections globally. The speed in distribution and inoculation of the vaccines in some of the key trading partners will affect the number of exports being demanded.
B: The Budget and Appropriations Committee (BAC) report on the 2021/22 Budget Policy Statement
During the week, the Budget and Appropriation Committee (BAC) presented the report on the Budget Policy Statement (BPS) and the Medium Term Debt Strategy (MTDS) for the 2021/2022 Financial Year to parliament. The BAC report, which was approved by the National Assembly on 4th March, set limits on the fiscal deficit to the lower of 7.5% of the country’s GDP or Kshs 930.0 bn, for the FY’2021/2022 financial year. The committee raised the concern that the existing expenditure pressures and revenue enhancement measures proposed by the BPS are similar to those that have been unsuccessful in the past, and therefore the set target of reducing the fiscal deficit to 4.5% of GDP by 2023/24 may not be achieved. The BAC, therefore, outlined recommendations that would restructure and limit government borrowing in the coming financial year in line with the aim of reducing the fiscal deficit.
Key take-outs from the report include;
Rates in the fixed income market have remained relatively stable but we have seen an upward trend in the short end due to increased borrowing by the government. The liquidity in the money market, coupled with the discipline by the Central Bank as they reject expensive bids has continued to check the rate of the rates increasing. The government is 13.1% behind its prorated borrowing target of Kshs 374.5 bn having borrowed Kshs 325.3 bn. In our view, due to the current subdued economic performance brought about by the effects of the COVID-19 pandemic, the government will record a shortfall in revenue collection with the target having been set at Kshs 1.9 tn for FY’2020/2021, thus leading to a larger budget deficit than the projected 7.5% of GDP, ultimately creating uncertainty in the interest rate environment as additional borrowing from the domestic market may be required to plug the deficit. Owing to this uncertain environment, our view is that investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk.
Market Performance:
During the week, the equities market recorded mixed performance, with NSE 20 gaining by 1.3%, while NASI and NSE 25 declined by 2.2% and 1.0% respectively, taking their YTD performance to gains of 6.3%, 5.2% and 3.7% for NASI, NSE 25 and NSE 20 respectively. The equities market performance was driven by gains recorded by large-cap stocks such as NCBA, Diamond Trust Bank (DTB-K), and EABL of 5.7%, 3.6%, and 1.8%, respectively. The gains were however weighed down by losses recorded by stocks such as Bamburi, Safaricom and BAT, which declined by 3.9%, 3.7% and 1.8%, respectively.
Equities turnover declined by 32.6% during the week to USD 19.5 mn, from USD 29.0 mn recorded the previous week, taking the YTD turnover to USD 198.2 mn. Foreign investors turned net sellers, with a net selling position of USD 2.5 mn, from a net buying position of USD 0.1 mn recorded the previous week, taking the YTD net selling position to USD 2.5 mn.
The market is currently trading at a price to earnings ratio (P/E) of 11.9x, 7.6% below the 11-year historical average of 12.9x. The average dividend yield is currently at 4.4%, 0.1% points above the 4.3% recorded the previous week, and 0.3% points above the historical average of 4.1%.
With the market trading at valuations below the historical average, we believe that there are pockets of value in the market for investors with a higher risk tolerance. The current P/E valuation of 11.9x, is 55.1% above the most recent valuation trough of 7.7x experienced in the first week of August 2020. The charts below indicate the market’s historical P/E and dividend yield.
Weekly Highlight:
During the week, Equity Group Holdings Plc signed a Kshs 16.5 bn (€125.0 mn) loan facility with the European Investment Bank (EIB) and the European Commission for onward lending to Micro Small and Medium-sized Enterprises (MSMEs), in line with its commitment to continually support the sector. This is the third tranche for Equity Group which has collectively earned approximately Kshs 33.0 bn to boost credit flows and liquidity to MSMEs in under 6 months after signing two other loans; USD 50.0 mn (Kshs 5.5 bn) with IFC in September 2020 and a USD 100.0 mn (Kshs 11.0 bn) with Proparco in October 2020. This is in line with the bank's efforts to raise up to Kshs 50.0 bn from foreign lenders over the next three years, as it aims to improve its liquidity and capital positions through a combination of long and medium-term debt. As of Q3'2020, Equity’s loan book had expanded by 30.1% to Kshs 453.9 bn, from Kshs 348.9 bn in Q3’2019, an indication of how it was helping its customers navigate the tough operating environment amid the pandemic. Notably, during the period under review, MSME’s contributed the largest portion of the Non-Performing Loans with an NPL ratio of 17.4%. Despite the commendable effort to lend to the MSMEs during this period, we believe that risks abound the banks’ asset quality on account of the elevated credit risk and the lenders exposure in SMEs.
During the week, Liberty Holdings Limited (Liberty), a financial services and property holding company announced plans to buy an additional 84.2 mn shares in Liberty Kenya Holdings Plc (LK), which represents 15.8% of the company. The deal entails a private sale of 49.5 mn ordinary shares from the Kimberlite Frontier Africa Master Fund (KFAMF), representing 9.2% of Liberty Kenya's issued share capital and a further 34.6 mn ordinary shares from Coronation Africa Frontiers which owns 6.5% of the company's stock. The planned acquisition will increase the company’s stake to 73.5% (393.6 mn ordinary shares) from the current 57.7% (309.3 mn ordinary shares), retaining Liberty’s status as the biggest shareholder of the insurer. The total cost of this transaction is Kshs 926.6 mn, with Liberty Holdings Limited buying each share at Kshs 11.0 while Liberty Kenya Holdings is currently trading at Kshs 8.1 indicating an undervaluation of 35.8%. For the 15.8% acquisition, Liberty Holdings limited will pay a cash consideration at completion of the transaction using an estimated price to book multiple of 0.1x. The stock is currently trading at a price to book of 0.6x, lower than the 0.8x industry average. Further, the agreement shall be subject to approval in different regulations, including the Capital Markets Authority (Kenya), and will be concluded on the fifth day after the date on which the last conditions applicable are fulfilled in accordance with the sale of shares agreement. We expect this move by Liberty Holdings to cause a rally in the share price as it shows their confidence in the company. Additionally, the buyback would lower capital holdings of the firm while increasing earnings per share, as at the end of the period there will be less shares in the market.
Earnings Release:
During the week, Stanbic Holdings released their FY’2020 financial results. Below is a summary of their performance;
Stanbic Holdings FY'2020 Key Highlights |
|||
Balance Sheet |
FY'2019 |
FY'2020 |
y/y change |
Net Loans and Advances |
191.2 |
196.3 |
2.7% |
Total Assets |
303.6 |
328.6 |
8.2% |
Customer Deposits |
224.7 |
260.0 |
15.7% |
Deposits per Branch |
8.6 |
10.4 |
20.3% |
Total Liabilities |
254.6 |
276.9 |
8.7% |
Shareholders' Funds |
49.0 |
51.7 |
5.5% |
Income Statement |
FY' 2019 |
FY'2020 |
y/y change |
Net interest Income |
13.3 |
12.8 |
(4.1%) |
Net non-interest income |
11.4 |
10.4 |
(8.7%) |
Total Operating income |
24.8 |
23.2 |
(6.2%) |
Loan loss provision |
(3.2) |
(4.9) |
54.8% |
Total Operating expenses |
(13.9) |
(12.1) |
(12.8%) |
Profit before tax |
7.7 |
6.2 |
(19.2%) |
Profit after tax |
6.4 |
5.2 |
(18.6%) |
Core EPS |
16.1 |
13.1 |
(18.6%) |
Key Ratios |
FY' 2019 |
FY'2020 |
% point change |
Yield on Interest Earning Assets |
7.9% |
7.2% |
(0.7%) |
Cost of Funding |
3.3% |
3.0% |
0.3% |
Net Interest Margin |
5.2% |
4.7% |
(0.5%) |
Non-Performing Loans (NPL) Ratio |
9.6% |
11.8% |
2.2% |
NPL Coverage |
57.1% |
60.6% |
3.5% |
Cost to Income with LLP |
56.2% |
52.2% |
(4.0%) |
Loan to Deposit Ratio |
85.1% |
75.5% |
(9.6%) |
Cost to Income Without LLP |
43.5% |
31.2% |
(12.2%) |
Return on Average Assets |
2.1% |
1.6% |
(0.5%) |
Return on Average Equity |
13.6% |
10.3% |
(3.3%) |
Capital Adequacy Ratios |
FY'2019 |
FY'2020 |
% point change |
Core Capital/Total Liabilities |
18.4% |
18.5% |
0.1% |
Minimum Statutory ratio |
8.0% |
8.0% |
0.0% |
Excess |
10.4% |
10.5% |
0.1% |
Core Capital/Total Risk Weighted Assets |
15.2% |
16.0% |
0.8% |
Minimum Statutory ratio |
10.5% |
10.5% |
0.0% |
Excess |
4.7% |
5.5% |
0.8% |
Total Capital/Total Risk Weighted Assets |
18.3% |
18.1% |
(0.2%) |
Minimum Statutory ratio |
14.5% |
14.5% |
0.0% |
Excess |
3.8% |
3.6% |
(0.2%) |
Liquidity Ratio |
58.4% |
56.4% |
(2.0%) |
Minimum Statutory ratio |
20.0% |
20.0% |
0.0% |
Excess |
38.4% |
36.4% |
(2.0%) |
Key take-outs from the earnings release include;
For a comprehensive analysis, please see our Stanbic Holdings FY’2020 Earnings Note
Universe of Coverage:
Company |
Price at 26/2/2021 |
Price at 5/3/2021 |
w/w change |
YTD Change |
Year Open 2021 |
Target Price* |
Dividend Yield |
Upside/ Downside** |
P/TBv Multiple |
Recommendation |
Diamond Trust Bank*** |
69.3 |
71.8 |
3.6% |
(6.5%) |
76.8 |
105.1 |
3.8% |
50.2% |
0.3x |
Buy |
I&M Holdings*** |
45.0 |
44.1 |
(2.0%) |
0.2% |
44.9 |
60.1 |
5.8% |
42.2% |
0.7x |
Buy |
Kenya Reinsurance |
2.5 |
2.6 |
5.2% |
7.8% |
2.3 |
3.3 |
4.2% |
30.2% |
0.3x |
Buy |
KCB Group*** |
38.8 |
38.2 |
(1.4%) |
0.9% |
38.4 |
46.0 |
9.2% |
29.6% |
1.0x |
Buy |
Sanlam |
9.6 |
11.2 |
16.4% |
(26.3%) |
13.0 |
14.0 |
0.0% |
25.6% |
0.8x |
Buy |
Britam |
7.3 |
7.1 |
(2.2%) |
4.0% |
7.0 |
8.6 |
3.5% |
24.3% |
0.8x |
Buy |
Standard Chartered*** |
134.8 |
134.5 |
(0.2%) |
(6.7%) |
144.5 |
153.2 |
9.3% |
23.2% |
1.1x |
Buy |
Liberty Holdings |
8.0 |
8.1 |
0.5% |
4.4% |
7.7 |
9.8 |
0.0% |
21.3% |
0.6x |
Buy |
ABSA Bank*** |
9.7 |
9.6 |
(1.2%) |
2.1% |
9.5 |
10.5 |
11.5% |
20.8% |
1.2x |
Buy |
Jubilee Holdings |
266.0 |
270.0 |
1.5% |
(3.5%) |
275.8 |
313.8 |
3.3% |
19.5% |
0.6x |
Accumulate |
Co-op Bank*** |
13.1 |
13.0 |
(0.4%) |
4.0% |
12.6 |
14.5 |
7.7% |
19.2% |
1.0x |
Accumulate |
Equity Group*** |
37.9 |
38.1 |
0.4% |
4.6% |
36.3 |
43.0 |
5.3% |
18.3% |
1.1x |
Accumulate |
Stanbic Holdings |
83.0 |
84.5 |
1.8% |
(2.4%) |
85.0 |
84.9 |
4.5% |
5.0% |
0.8x |
Hold |
NCBA*** |
24.5 |
25.9 |
5.7% |
(7.9%) |
26.6 |
25.4 |
1.0% |
(1.0%) |
0.6x |
Sell |
CIC Group |
2.3 |
2.2 |
(3.5%) |
9.0% |
2.1 |
2.1 |
0.0% |
(5.4%) |
0.8x |
Sell |
HF Group |
3.5 |
3.5 |
(1.1%) |
11.1% |
3.1 |
3.0 |
0.0% |
(13.0%) |
0.2x |
Sell |
*Target Price as per Cytonn Analyst estimates **Upside/ (Downside) is adjusted for Dividend Yield ***For Disclosure, these are banks in which Cytonn and/ or its affiliates are invested in |
We are “Neutral” on the Equities markets in the short term. We expect the recent discovery of a new strain of COVID-19 coupled with the introduction of strict lockdown measures in major economies to continue dampening the economic outlook. However, we maintain our bias towards a “Bullish” equities markets in the medium to long term. We believe there exist pockets of value in the market, with a bias on financial services stocks given the resilience exhibited in the sector. The sector is currently trading at historically cheaper valuations and as such, presents attractive opportunities for investors.
During the week, Acorn Holdings, a real estate developer announced that InfraCo, a United Kingdom-funded private infrastructure development group has invested Kshs 1.0 bn to the firm’s real estate investment trust (REIT) intended to support the construction of 10,000 affordable student accommodation units in Nairobi. InfraCo is the anchor investor for the Acorn Development and Income REITS. The development real estate investment trust (D-REIT) is expected to finance the student hostels whereas the Investment real estate investment trust (I-REIT) will be used to acquire properties and hold them for rental income.
The move by Acorn Holdings to focus on I-REITS and D-REITS as the main source of funding for its student housing projects signals that investors continue to explore available structured financing options in the capital markets. Currently, there is a heavy reliance on bank funding as opposed to funding from the capital markets, with 95.0% of business funding in Kenya being sourced from the banking industry and only 5.0% from the latter. 8 years since the inception of the regulatory framework, the REITS market has remained underdeveloped with only one I-REIT, and no D-REIT with the Fusion Capital D-REIT, which was launched in 2016, having failed due to low subscription rates while the Cytonn D-REIT was not progressed by the Capital Markets Authority due to the limited number of approved REIT trustees in the market. The poor performance of the REITs is attributed to (i) the high minimum investment amounts set at Kshs 5.0 mn, (ii) high minimum capital requirement for a trustee at Kshs 100.0 mn, which essentially limits the eligible trustees to only banks, effectively eliminating Corporate Trustees, (iii) sluggish growth in select sectors within the real estate market, and, (iv) lengthy approval process. To jumpstart the D-REIT market, the market needs to confront these challenges.
Student accommodation has relatively high yields of 7.4% as per the Cytonn Student Housing Market Kenya Research compared to other real estate sectors like the residential and Mixed-use developments which have an average rental yield of 4.7% and 7.1% respectively as shown below;
Source: Cytonn Research
The above implies that investors are up to benefit from high returns if they invest in these developments amidst the high demand for student accommodation as a result of the growing number of students. As of 2018, the number of available student housing stood at 300,000 against a university enrolment of 520,900 according to the ministry of education with the exclusion of technical colleges. This implies that there is a huge deficit of student accommodation which has been accelerated by i) high land rates, ii) insufficient access to funding, and, iii) inadequate expertise to build and manage student housing.
The continued focus on REITS by Acorn and ability to secure an anchor investor, signals hope for the real estate sector developers to raise funds to finance their investments from the capital markets
According to the Kenya National Bureau of Statistics (KNBS) FinAccess Report 2019, the pensions industry has witnessed significant growth with the number of registered members growing by a 10-year CAGR of 15.7% to 3.0 mn members in 2019, from 0.7 mn registered members in 2009. Additionally, Assets Under Management have grown by a 10-year CAGR of 15.8% to Kshs 1.3 tn as of December 2019, from Kshs 0.3 tn in 2009. This growth has been attributed to the mass education drives on the importance of retirement savings by the Retirement Benefits Authority and the industry players. Financial technology has also played a huge role by; i) making it easier for Kenyans to join and contribute to pension schemes, and, ii) improving the communication between the schemes and members.
This week, we turn our focus to the historical performance and asset allocation of pension schemes in Kenya with a key focus on 2020. We will also analyze some of the asset classes such as offshore investments and alternative investments that pension scheme performances can leverage more on in order to improve the welfare of their members. Therefore, we shall look at the topic in five different sections:
Section 1: Introduction to Retirement Benefits Schemes in Kenya
A retirement benefits scheme is a savings avenue that allows contributing individuals to make regular contributions during their productive years into the scheme and thereafter get income from the scheme upon retirement. There are a number of benefits that accrue to retirement benefits scheme members, including:
There are different ways of categorizing pension schemes namely, based on type of membership, mode of investment, contribution and payment at retirement.
Section 2: Historical Pension Schemes Allocation
In Kenya, the Retirement Benefits (Forms and Fees) Regulations, 2000 provides investment guidelines for retirement benefits schemes in Kenya specifically on which asset classes to invest in and what the limits should be. Some of the investments assets include: government securities, fixed deposits, quoted equities and immovable property among others. In line with the regulators’ guidelines, pension schemes formulate their own Investment Policy Statements (IPS) that will act as guidance on how much they can invest in different assets and assists the trustees of the schemes to effectively supervise, monitor and evaluate the performance of the Fund’s investment assets. The IPS of the various schemes vary depending on the risk return profile and expectations largely determined by the demographic of the scheme members and the general economic outlook. For example, a pension scheme with a high ratio of members nearing the retirement age will not be heavily exposed to long-term and illiquid asset classes such as Immovable Property given that the scheme will need to pay out the retirement benefits to those retiring and such illiquid assets may be difficult to dispose. Therefore, such provisions will be reflected in the scheme’s IPS.
The table below shows how Kenyan pension funds have invested their assets in the past:
Kenyan Pension Funds Asset Allocation |
||||||||||
Asset Class |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
H1'2020 |
Average |
Allowable Limit |
Government Securities |
33.8% |
31.0% |
29.8% |
38.3% |
36.5% |
39.4% |
42.0% |
44.0% |
36.8% |
90.0% |
Quoted Equities |
25.5% |
26.0% |
23.0% |
17.4% |
19.5% |
17.3% |
17.6% |
14.2% |
20.1% |
70.0% |
Immovable Property |
17.2% |
17.0% |
18.5% |
19.5% |
21.0% |
19.7% |
18.5% |
18.6% |
18.8% |
30.0% |
Guaranteed Funds |
10.3% |
11.0% |
12.2% |
14.2% |
13.2% |
14.4% |
15.5% |
16.7% |
13.4% |
100.0% |
Listed Corporate Bonds |
4.4% |
6.0% |
5.9% |
5.1% |
3.9% |
3.5% |
1.4% |
0.7% |
3.9% |
20.0% |
Fixed Deposits |
4.9% |
5.0% |
6.8% |
2.7% |
3.0% |
3.1% |
3.0% |
3.4% |
4.0% |
30.0% |
Offshore |
2.2% |
2.0% |
0.9% |
0.8% |
1.2% |
1.1% |
0.5% |
0.4% |
1.1% |
15.0% |
Cash |
1.3% |
1.0% |
1.4% |
1.4% |
1.2% |
1.1% |
1.2% |
1.6% |
1.3% |
5.0% |
Unquoted Equities |
0.6% |
1.0% |
0.4% |
0.4% |
0.4% |
0.3% |
0.3% |
0.2% |
0.5% |
5.0% |
Private Equity |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.1% |
0.1% |
0.1% |
0.0% |
10.0% |
REITs |
0.0% |
0.0% |
0.0% |
0.1% |
0.1% |
0.1% |
0.0% |
0.0% |
0.0% |
30.0% |
Commercial Paper, non-listed bonds by private companies* |
- |
- |
- |
- |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
10.0% |
Others e.g. Unlisted Commercial Papers |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
10.0% |
100.0% |
100.0% |
100.0% |
100.0% |
100.0% |
100.0% |
100.0% |
100.0% |
100.0% |
||
Commercial paper, non-listed bonds, and other debt instruments issued by private companies were introduced as a new separate asset class category in 2016 through legal notice No. 107. |
Source: Retirement Benefits Authority (RBA)
Key Take-outs from the table above are:
We switch gears now to the performance of the mentioned asset classes grouped in three broad groups, namely; Fixed Income, Equity and Offshore. Below is a graph for the performances over the period 2013 to 2020:
Source: ACTSERV Survey Reports (Segregated Schemes)
Key Take-outs from the graph above are:
Section 3: Performance of Pension Schemes
The average returns of the Guaranteed Funds over the period 2013 to 2019 was 9.7% whereas Segregated Schemes’ members enjoyed a higher return of 12.0% during the period. Key to note, segregated schemes performance fluctuates over the years reflective of the markets performance whereas guaranteed performance has remained somewhat stable over the years. The stability of returns is attributed to the fact that, unlike segregated funds, guaranteed funds do not have an obligation to distribute all the returns, net of fees, that they attain in a given year; instead they have an obligation to distribute the minimum guaranteed return regardless of their investments performance. The two types of schemes reflect the different risk profiles of Retirement Benefits Scheme members; those with a lower risk appetite prefer to join a Guaranteed Fund due to the fact that it guarantees a minimum return rate while those members with a relatively higher risk appetite can be found in segregated schemes as they are more comfortable with market fluctuations and seek higher interest rates. The chart below highlights the performance of the two types of pension schemes over a 7-year period:
Sources: ACTSERV Surveys, Cytonn Research
The poor performance of the Equity markets and the decline in the Fixed Income markets were mirrored in the Pension schemes’ performance given the high allocation in the two Markets. Some of the key impacts that the pandemic has had on retirement schemes include:
Source: ACTSERV Survey Reports (Segregated Schemes)
The overall return for segregated schemes during the year 2020 dropped to 7.0%, down from the 17.0% recorded in 2019. This was mainly attributable to the effects that the pandemic had on both the equity markets. We expect that as the gradual recovery of the economy as evidenced by the 6.3% YTD gain of the NASI and the upward shift of the yield curve will translate to improved returns for pension schemes in the country especially given the high allocation to equities and government securities.
Section 4: Other Asset Classes that Pension Schemes can take advantage of
Over the years, retirement benefits schemes have skewed their investments towards traditional assets, namely, Fixed Income and Equities Market, averaging 56.9% against the total allowable limit of 100.0% in these two asset classes. In terms of the Alternatives Market i.e. immovable property, Private Equity as well as Real Estate Investments Trusts (REITs), the industry has an average allocation of 18.8% against the total allowable limit of 70.0% in these asset classes. As such, we believe that this is an area that pension schemes can leverage their performance on by increasing allocation to these alternative asset classes.
Offshore investments are investments made outside the jurisdiction or country in which the investor resides. The investor may be an individual, corporation or a fund looking to take advantage of tax incentives offered in other countries or to diversify their portfolio. Examples of offshore investments include (i) Mutual Funds, for the risk averse investors, (ii) Private Equity, for the investor with a high risk appetite, and (iii) Purchase of precious metals offshore.
Historically, pension schemes have consistently allocated over 75.0% over their assets in government securities, quoted equities and immovable property leaving alternative asset classes such as private equity, real estate investment trusts and offshore investments with little to work with. The average allocation to offshore investments in the period 2013 to 2019 is a mere 1.2% (Kshs 1.2 bn) of the total Kenyan retirement benefits industry assets. However, the Retirement Benefits Authority allows pension schemes to invest up to 15.0% of their assets in offshore investments in bank deposits government securities, listed equities, rated Corporate Bonds and offshore collective investment schemes reflecting these assets.
Source: Retirement Benefits Authority (RBA)
Key to note, the maximum allowable limit for offshore investments is 15.0%. Some of the reasons for the low allocation in the offshore investments in the pensions industry include; low financial awareness among pension trustees, high risk associated with the asset category and to a lesser extent high bureaucracy in investments decision making. Despite these challenges, we believe diversifying into offshore investments can help pension schemes by bolstering their returns by taking advantage of performances in the global markets and providing a hedge against local markets volatility. The optimal investment horizon is three to five years to fully take advantage of the returns.
Additionally, some offshore countries have laws that prevent the investor from certain legal actions such as seizure of assets and in this way, the offshore investment act as a type of “insurance”. Investing in offshore countries can also help to serve as a hedge against inflation and lower returns offered by asset categories in an investor’s home country.
Alternative investments are supplemental strategies to traditional long-only positions in equities, bonds, and cash. They differ from the traditional investments on the basis of complexity, liquidity, and regulations. Alternative investments that pension schemes can invest in include immovable property, private equity and real estate investment trusts. The maximum allowable allocation to these assets is a total of 70.0% but historically pension schemes have allocated an average of only 18.8% in the period 2013 to H1’2020, with the vast allocation to immovable property, an average of 18.8% during the period.
Fund Managers’ low allocation in alternatives can be attributed to lack of expertise and experience with asset classes such as private equity and real estate, as investing in these asset classes requires detailed due diligence and evaluation as well as engaging legal, financial and sector-specific expertise.
We believe that there is value in the alternative markets that pension schemes can take advantage of. Some of the key advantages of alternatives include:
Section 5: Challenges affecting Growth in the Pensions Industry in Kenya
As mentioned earlier, the pensions industry in Kenya has experienced commendable growth over the last 10 years. Some of the main factors that have contributed to this growth include:
However, there still remains persistent challenges that have slowed down the growth rate, namely:
Section 6: Conclusion and Recommendations
Over the years, we have seen slight changes in the actual holdings of the retirement benefits schemes, with their allocation being skewed towards traditional assets. It is important for Fund Managers to have a well-balanced portfolio on a risk-return basis to ensure that they offer their members high returns and at the same time protecting their contributions. Ultimately, there are risks that pension funds cannot avoid such as systemic risk, however, diversification into other assets helps mitigate these risk and optimize returns. Overall, given the continued changes in the Retirement Benefits Industry and increased knowledge of investments, the sector is expected to do well both in terms of growth and returns offered to members. This can be further supported through:
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.