By Research Team, Nov 29, 2020
During the week, T-bills were undersubscribed, with the overall subscription rate coming in at 64.3%, down from 104.2% the previous week. The highest subscription rate was in the 91-day paper, which came in at 114.5%, down from 139.6% recorded the previous week. The subscription for the 182-day paper declined to 63.7% from 65.0%, while that of the 365-day paper dropped to 44.7% from 129.3% recorded the previous week. During the week, the World Bank released the 22nd Edition of the Kenya Economic Outlook: Navigating the pandemic, highlighting that the pandemic has had severe impact on the Kenyan Economy with the GDP projected to contract by 1.0% in 2020 but recover faster to grow at 6.9% in 2021. The Monetary Policy Committee (MPC) met on 26th November 2020 to review the prevailing macroeconomic conditions and decide on the direction of the Central Bank Rate (CBR). The MPC retained the CBR at 7.0% which is in line with our expectations in our MPC November 2020 Note;
During the week, the equities market was on a downward trajectory, with NSE 20, NASI and NSE 25 recording losses of 1.6%, 0.3% and 0.4% respectively, taking their YTD performance to losses of 33.8%, 20.9% and 13.9%, for NSE 20, NSE 25 and NASI, respectively. The equities market performance was driven by losses recorded by large cap stocks such as Diamond Trust Bank, Equity Group and EABL of 2.8%, 2.7% and 0.8%, respectively. The losses were however mitigated by gains recorded by KCB Group, NCBA Group and BAT of 2.6%, 1.1% and 0.5%, respectively. During the week, KCB Group disclosed that it had entered into an agreement with Atlas Mara Limited (ATMA) to acquire 62.1% stake in Banque De Populaire du Rwanda (BPR) in Rwanda and 100.0% stake in African Banking Corporation Ltd Tanzania (ABC Tanzania). Additionally, during the week, Diamond Trust Bank (DTB-K), NCBA Group and Stanbic Bank released their Q3’2020 financial results;
During the week, Hydro Developers Limited, a real estate developer based in Nairobi, partnered with the Kenyan government in the construction of approximately 30,489 affordable units under the Big Four Agenda, at a cost of Kshs 3.0 bn. In the retail sector, Naivas supermarket opened two new branches, one located at Ananas mall in Thika and the other one in Nairobi CBD’s Hazina Mall bringing the retailer’s total operational outlets to 68. In the infrastructure sector, Kenya Urban Roads Authority (KURA) announced plans to construct two elevated carriage ways within the Nairobi Central Business District (CBD);
In this week’s focus, following the continued depreciation of the Kenya Shilling against the US Dollar and various accusations on the Central Bank of Kenya, (CBK), with regards to currency manipulation, we decided to do a note focused on understanding the various currency regimes and how countries use them to ensure currency stability, how to find the value of a currency and the factors that have been driving the performance of the Kenya shilling. Due to Covid-19 pandemic related occurrences, the Kenyan shilling has remained under pressure with the CBK conducting interventions that have been interpreted as influences to undervalue the shilling so as to protect it from further depreciation.
Money Markets, T-Bills & T-Bonds Primary Auction:
During the week, T-bills were undersubscribed, with the overall subscription rate coming in at 64.3%, down from 104.2% the previous week. The highest subscription rate was in the 91-day paper, which came in at 114.5%, down from 139.6% recorded the previous week. The subscription for the 182-day paper declined to 63.7% from 65.0%, while that of the 365-day paper dropped to 44.7% from 129.3% recorded the previous week. The yields on the 91-day, 182-day and 364-day increased marginally by 2.4 bps, 4.1 bps and 5.7 bps to 6.7%, 7.2% and 8.2%, respectively. The government continued to reject expensive bids with the acceptance rate declining to 87.2%, from 96.6% recorded the previous week, accepting bids worth Kshs 13.4 bn out of the Kshs 15.4 bn worth of bids received.
In the money markets, 3-month bank placements ended the week at 7.5% (based on what we have been offered by various banks), while the yield on the 91-day increased marginally by 2.4 bps to close at 6.7%. The average yield of the Top 5 Money Market Funds increased by 0.1% points to 10.1% from 10.0% recorded the previous week. The yield on the Cytonn Money Market Fund remained unchanged at 10.5%, similar to what was recorded the previous week.
Liquidity:
The money markets remained liquid during the week, with the average interbank rate increasing marginally by 0.5% points to 3.5%, from the 2.9% recorded the previous week. This was supported by government payments, which partly offset tax receipts. The average interbank volumes also increased by 173.2% to Kshs 12.8 bn from Kshs 4.7 bn, recorded the previous week. According to the Central Bank of Kenya’s weekly bulletin released on 27th November 2020, commercial banks’ excess reserves stood at Kshs 6.3 bn in relation to the 4.25% cash reserves requirement (CRR).
Kenya Eurobonds:
During the week, the yields on all Eurobond yields declined pointing to improved foreign investor sentiments. This was following the announcement of a USD 2.3 bn IMF drawdown facility to help mitigate Covid-19 related economic shocks and the news of Kenya’s intention to join the Paris club - Debt Service Suspension Initiative (DSSI) that will aid in debt sustainability. According to Reuters, the yield on the 10-year Eurobond issued in June 2014 declined by 0.6% points to 4.1% from 4.7%, as was recorded the previous week.
During the week, the yields on the 10-year and 30-year Eurobonds issued in 2018, on the other hand, declined by 0.5% points and 0.4% points to 5.4% and 7.2%, respectively, from 5.9% and 7.6% recorded previous week
During the week, the yields on the 2019 dual-tranche Eurobonds also declined, with the 7-year Eurobond and the 12-year Eurobond declining by 0.3% points and 0.6% points to 5.1% and 6.0%, from 5.4% and 6.6% recorded last week.
Kenya Shilling:
During the week, the Kenyan shilling depreciated against the US dollar by 0.4% to Kshs 109.9 from Kshs 109.4, mainly attributable to the persistent dollar demand from general importers as they meet their end of month obligations, as well as low inflows from sectors like horticulture and tourism. On a YTD basis, the shilling has depreciated by 8.4% against the dollar, in comparison to the 0.5% appreciation in 2019. We expect continued pressures on the Kenyan shilling due to:
However, in the short term, the shilling is expected to be supported by:
Weekly Highlight:
During the week, the World Bank released the 22nd edition of the Kenya economic outlook – Navigating the pandemic. The report highlighted that Kenya’s economic outlook remains highly uncertain, as the COVID-19 pandemic has severely affected the country, with the GDP contracting by 5.7% as discussed in our Q2’2020 GDP Note. Some of the key take-outs include:
Tax revenue underperformed by Kshs 41.7 bn (0.4% of GDP) to close at Kshs 342.5 bn (3.0% of GDP), below the target of Kshs 384.3bn, for Q1 of FY2020/21. The revenue under-collection arose from shortfalls due to tax relief granted to mitigate the impact of COVID-19 and low economic activity. On the other hand, Monetary policy has been accommodative to mitigate the impact of the pandemic with the Central Bank reducing the policy rate to 7.0% in April from the previous 8.25% at the beginning of the year and the cash requirement ratio to 4.25% from 5.25% in March and maintaining them up to now,
The chart below indicates the growth in private credit growth over the last few years:
The figure below shows Kenya’s debt composition as of June 2020 with 55.2% of the total debt being foreign borrowing:
As at June 2020, external debt composition comprised of multilateral, bilateral and commercial debt at 37.8%, 30.7% and 31.5% of the total external debt, respectively. Below is a breakdown of Kenya’s external debt:
|
Jun-18 |
Jun-19 |
Jun-20 |
|||
|
USD mn |
|
USD mn |
|
USD mn |
|
Multilateral debt |
8,031.40 |
33.5% |
8,938.50 |
30.2% |
12,407.10 |
37.8% |
Bilateral debt |
7,533.40 |
31.5% |
9,736.80 |
32.9% |
10,084.80 |
30.7% |
Commercial debt |
8,219.70 |
34.3% |
10,711.40 |
36.2% |
10,340.00 |
31.5% |
Export Credit |
165.5 |
0.7% |
165.5 |
0.6% |
0 |
0.0% |
Total |
23,950.00 |
|
29,552.20 |
|
32,831.90 |
|
Balance of Payments: Kenya’s external trade position has been supported by import compression and resilient remittances. The current account deficit fell to 4.5 % of GDP in the 12-month to August 2020, from 5.2 % of GDP over the same period 2019, driven by resilient diaspora remittance inflows, and lower imports of goods and services which more than outweighed a decline in exports of goods and services. Following containment measures in Kenya and its trading partners, both merchandise exports and imports contracted sharply year to date. The current account deficit is financed through borrowings and private investments, these has led to the capital and financial account balance declining to 3.8% of GDP in the year to August 2020 compared to 6.7% of GDP in the year to August 2019. The external financing pressures has increased with the continued depreciation of the shilling against the dollar.
In conclusion, the report takes a baseline assumption that Kenya’s economic output is projected to contract by 1.0 % in 2020, and rebound in 2021 to grow by 6.9%. The base case projections assume that the economic effects of COVID-19 are expected to fade by early to mid-2021, as vaccines and additional treatments become available. Even with the economy set for recovery, as shown by an improvement in the leading economic indicators; We are of the view that the 6.9% growth in 2021 is quite ambitious given that we are already in the last quarter of 2020 and there has been a recent spike in the number of Covid infection, not only in Kenya but globally.
MPC November 2020 Meeting
The Monetary Policy Committee (MPC) met on 26th November 2020 to review the prevailing macroeconomic conditions and decide on the direction of the Central Bank Rate (CBR). The MPC retained the CBR at 7.0% which is in line with our expectations MPC November 2020 Note. This is the fifth straight time that the committee is retaining the rate at 7.0% following the rate cut in April 2020, indicating that it was having its intended outcome. The key highlights from the meeting:
The MPC concluded that the current accommodative monetary policies together with the fiscal measures are still being transmitted to support the economy, and therefore decided to retain the Central Bank Rate (CBR) at 7.0%. The Committee will meet again in January 2021, but remains ready to re-convene earlier if necessary.
Rates in the fixed income market have remained relatively stable due to the high liquidity in the money markets, coupled with the discipline by the Central Bank as they reject expensive bids. The government is 48.7% ahead of its prorated borrowing target of Kshs 196.4 bn having borrowed Kshs 291.9 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.
During the week, the equities market was on a downward trajectory, with NSE 20, NASI and NSE 25 recording losses of 1.6%, 0.3% and 0.4% respectively, taking their YTD performance to losses of 33.8%, 20.9% and 13.9%, for NSE 20, NSE 25 and NASI, respectively. The equities market performance was driven by losses recorded by large cap stocks such as Diamond Trust Bank, Equity Group and EABL of 2.8%, 2.7% and 0.8%, respectively. The losses were however mitigated by gains recorded by KCB Group, NCBA Group and BAT of 2.6%, 1.1% and 0.5%, respectively.
Equities turnover rose by 6.5% during the week to USD 21.3 mn, from USD 20.0 mn recorded the previous week, taking the YTD turnover to USD 1.3 bn. Foreign investors turned net sellers during the week, with a net selling position of USD 3.0 mn, from a net buying position of USD 0.2 mn recorded the previous week, taking the YTD net selling position to USD 280.9 mn.
The market is currently trading at a price to earnings ratio (P/E) of 10.7x, 17.3% below the 11-year historical average of 13.0x. The average dividend yield is currently at 4.9%, unchanged from what was recorded the previous week, and 0.9% points above the historical average of 4.0%.
With the market trading at valuations below the historical average, we believe there are pockets of value in the market for investors with higher risk tolerance and are willing to wait out the pandemic. The current P/E valuation of 10.7x is 39.1% above the most recent valuation trough of 7.7x experienced in the first week of August 2020. The charts below indicate the historical P/E and dividend yields of the market.
Weekly Highlight:
During the week, KCB Group disclosed that it had entered into an agreement with Atlas Mara Limited (ATMA) to acquire 62.1% stake in Banque De Populaire du Rwanda (BPR) in Rwanda and 100.0% stake in African Banking Corporation Ltd Tanzania (ABC Tanzania).
Key to note, Equity Group had previously entered into a binding agreement in April 2019 with Atlas Mara on the acquisition of banking assets in four countries (Rwanda, Tanzania, Zambia and Mozambique); 62.0% of the share capital of Banque Populaire du Rwanda (BPR); 100.0% of the share capital of Africa Banking Corporation Zambia (ABCZam) Ltd; 100.0% of the share capital of Africa Banking Corporation Tanzania (ABCTz); and, 100.0% of the share capital of Africa Banking Corporation Mozambique Ltd (ABCMoz). The transaction was to be funded by a share swap whereby Atlas Mara would be allotted Kshs 252.5 mn shares of Equity Group, equivalent to a 6.7% stake valued at about Kshs 8.9 bn using the closing price of Kshs 35.1 on 26th June 2020 and effectively valuing Equity Group at Kshs 132.3 bn. However, as highlighted in our Cytonn Weekly #26/2020, in June 2020, the two parties mutually agreed to call off the acquisition plans as the Group was working to enhance their strategy following the COVID-19 pandemic which involved conserving cash and having liquidity.
In the 62.1% BPR acquisition, KCB will pay a cash consideration based on the net asset value of the BPR at completion of the transaction using a price to book multiple of 1.1x. Key to note, according to the latest BPR financials, the bank had a book value of Rwf 46.6 bn (Kshs 5.2 bn), and thus at the trading multiple of 1.1x, we estimate KCB will have to part with Kshs 5.7 bn. The Group also separately intends to make an offer to acquire the remaining shares from the respective shareholders. The proposed acquisition is subject to approval from the shareholders, the Central Bank of Kenya, the National Bank of Rwanda, the COMESA Competition Commission and the Capital Markets Authority. KCB has also agreed to purchase 96.6% stake of ABC Tanzania held by ABC Holdings Limited (ABCH), the wholly owned subsidiary of Atlas Mara. Additionally, KCB separately intends to make an offer to acquire the remaining shares of 3.4% from the Tanzania Development Finance Company Limited. Subject to the approval of the shareholders and the regulatory authorities in Kenya and Tanzania, the current price to book multiple for the acquisition stands at 0.4x.
In our view, the proposed acquisition of the banks by KCB Group will see the group increase its footprint in the region in line with its expansion strategy. Additionally, the acquisitions will present an opportunity for increased profitability as the bank expects the two banks to help drive business growth in the future. We believe that this deal will lead to the growth in the Group’s interest income which stood at Kshs 63.3 bn in Q3’2020 given that both banks being acquired rely heavily on funded income at a mix of 76:24 for BPR and 84:16 for ABC Tanzania according to their H1’2020 results. Key to note, BPR recorded a profit after tax (PAT) of Rwf 2.2 bn (Kshs 243.2 mn) in H1’2020, a 65.2% increase from Rwf 1.3 bn (Kshs 147.2 mn) in H1’2019. ABC Tanzania, on the other hand, recorded losses of Tshs 46.4 mn (Kshs 2.2 mn) in H1’2020, from Tshs 2.7 bn (Kshs 126.1 mn) losses recorded in H1’2019. Given the poor performance of ABC Tanzania over the years, we believe that the acquisition might be a net negative for the Group in the short term, as the Group works towards saving the struggling bank, additionally, at an acquisition multiple of 1.1x book, it appears expensive given the recent acquisition multiple average of 0.8x over the last 3 years.
Below is a summary of the deals in the last 5-years that have either happened, been announced, or expected to be concluded;
Acquirer |
Bank Acquired |
Book Value at Acquisition (Kshs. Bns) |
Transaction Stake |
Transaction Value |
P/Bv Multiple |
Date |
KCB Group |
Banque Commerciale Du Congo |
5.2 |
62.1% |
5.7 |
1.1x |
Nov-20* |
KCB Group |
ABC Tanzania |
Unknown |
100.0% |
Undisclosed |
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 |
51.0% |
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 |
100.0% |
6.6 |
0.9x |
Sep-19 |
CBA Group |
NIC Group |
33.5 |
53%:47% |
23 |
0.7x |
Sep-19 |
Oiko Credit |
Credit Bank |
3 |
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 |
100.0% |
5 |
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 |
|
|
75.2% |
|
1.2x |
|
* Announcement Date ** Deals that were dropped |
Earnings Releases:
During the week, NCBA Group, Diamond Trust Bank Kenya (DTB-K) and, Stanbic Bank released their Q3’2020 financial results. Below is a summary of their performance;
*Note that the figures for Q3’2019 are combined from CBA’s and NIC’s Q3’2019 releases.
NCBA Group Q3’2020 Key Highlights |
|||
Balance Sheet |
|||
Balance Sheet Items |
Q3’2019 (Kshs bn) |
Q3’2020 (Kshs bn) |
y/y change |
Government Securities |
147.7 |
166.2 |
12.5% |
Net Loans and Advances |
248.8 |
249.7 |
0.4% |
Total Assets |
487.9 |
519.2 |
6.4% |
Customer Deposits |
372.4 |
402.6 |
8.1% |
Deposits per Branch |
4.5 |
5.9 |
30.4% |
Total Liabilities |
416.9 |
448.5 |
7.6% |
Shareholders’ Funds |
70.7 |
70.4 |
(0.4%) |
Income Statement |
|||
Income Statement Items |
Q3’2019 (Kshs bn) |
Q3’2020 (Kshs bn) |
y/y change |
Net Interest Income |
16.1 |
17.0 |
5.3% |
Net non-Interest Income |
14.4 |
16.1 |
11.8% |
Total Operating income |
30.5 |
33.1 |
8.4% |
Loan Loss provision |
4.3 |
13.4 |
210.6% |
Total Operating expenses |
18.9 |
28.6 |
51.2% |
Profit before tax |
10.9 |
3.8 |
(65.3%) |
Profit after tax |
7.7 |
2.5 |
(67.3%) |
Core EPS |
5.1 |
1.7 |
(67.3%) |
Key Ratios |
|||
Ratios |
Q3’2019 |
Q3’2020 |
% point change |
Yield on Interest Earning Assets |
9.7% |
6.1% |
(3.6%) |
Cost of Funding |
4.6% |
3.1% |
(1.5%) |
Net Interest Margin |
5.0% |
3.1% |
(1.9%) |
Non-Performing Loans (NPL) Ratio |
12.4% |
14.1% |
1.7% |
NPL Coverage |
60.2% |
58.3% |
(1.9%) |
Cost to Income with LLP |
62.0% |
86.5% |
24.5% |
Loan to Deposit Ratio |
66.8% |
63.0% |
(3.8%) |
Cost to Income Without LLP |
48.0% |
46.2% |
(1.8%) |
Return on Average Assets |
14.9% |
3.9% |
(11.0%) |
Return on Average Equity |
2.2% |
0.5% |
(1.7%) |
Equity to Assets Ratio |
14.5% |
13.6% |
(0.9%) |
Capital Adequacy Ratios |
|||
Ratios |
Q3’2019 |
Q3’2020 |
% point change |
Core Capital/Total Liabilities |
17.2% |
16.9% |
(0.3%) |
Minimum Statutory ratio |
8.0% |
8.0% |
0.0% |
Excess / Deficit |
9.2% |
8.9% |
(0.3%) |
Core Capital/Total Risk Weighted Assets |
16.6% |
18.1% |
1.5% |
Minimum Statutory ratio |
10.5% |
10.5% |
0.0% |
Excess / Deficit |
6.1% |
7.6% |
1.5% |
Total Capital/Total Risk Weighted Assets |
17.5% |
18.6% |
1.1% |
Minimum Statutory ratio |
14.5% |
14.5% |
0.0% |
Excess / Deficit |
3.0% |
4.1% |
1.1% |
Key take-outs from the earnings release include;
For a comprehensive analysis, please see our NCBA Group Q3’2020 Earnings Note
Diamond Trust Bank Q3’2020 Key Highlights |
|||
Balance Sheet |
|||
Balance Sheet Items |
Q3’2019 (Kshs bn) |
Q3’2020 (Kshs bn) |
y/y change |
Government Securities |
127.5 |
134.1 |
5.1% |
Net Loans and Advances |
192.0 |
205.6 |
7.1% |
Total Assets |
382.5 |
394.0 |
3.0% |
Customer Deposits |
283.1 |
288.2 |
1.8% |
Deposits per Branch |
2.1 |
2.1 |
0.0% |
Total Liabilities |
317.8 |
324.9 |
2.2% |
Shareholders’ Funds |
58.9 |
62.8 |
6.6% |
Income Statement |
|||
Income Statement Items |
Q3’2019 (Kshs bn) |
Q3’2020 (Kshs bn) |
y/y change |
Net Interest Income |
13.8 |
13.9 |
0.9% |
Net non-Interest Income |
4.4 |
5.0 |
15.3% |
Total Operating income |
18.2 |
18.9 |
4.4% |
Loan Loss provision |
0.9 |
2.9 |
232.1% |
Total Operating expenses |
9.5 |
12.4 |
30.4% |
Profit before tax |
8.7 |
6.6 |
(24.0%) |
Profit after tax |
6.0 |
4.3 |
(27.8%) |
Core EPS |
21.4 |
15.5 |
(27.8%) |
Key Ratios |
|||
Ratios |
Q3’2019 |
Q3’2020 |
% point change |
Yield on Interest Earning Assets |
9.9% |
9.3% |
(0.6%) |
Cost of Funding |
4.6% |
4.2% |
(0.4%) |
Net Interest Margin |
5.3% |
5.1% |
(0.2%) |
Non-Performing Loans (NPL) Ratio |
8.9% |
8.7% |
(0.2%) |
NPL Coverage |
48.0% |
54.7% |
6.7% |
Cost to Income with LLP |
52.2% |
65.2% |
13.0% |
Loan to Deposit Ratio |
67.8% |
71.4% |
3.6% |
Cost to Income Without LLP |
47.4% |
50.0% |
2.6% |
Return on Average Assets |
13.4% |
9.2% |
(4.2%) |
Return on Average Equity |
1.4% |
1.4% |
0.0% |
Equity to Assets Ratio |
15.4% |
15.9% |
0.5% |
Capital Adequacy Ratios |
|||
Ratios |
Q3’2019 |
Q3’2020 |
% point change |
Core Capital/Total Liabilities |
21.0% |
23.3% |
2.3 |
Minimum Statutory ratio |
8.0% |
8.0% |
0.0% |
Excess/Deficit |
13.0% |
15.3% |
2.3% |
Core Capital/Total Risk Weighted Assets |
19.1% |
19.2% |
0.1% |
Minimum Statutory ratio |
10.5% |
10.5% |
0.0% |
Excess/Deficit |
8.6% |
8.7% |
0.1% |
Total Capital/Total Risk Weighted Assets |
21.2% |
20.8% |
(0.4%) |
Minimum Statutory ratio |
14.5% |
14.5% |
0.0% |
Excess/Deficit |
6.7% |
6.3% |
(0.4%) |
The bank’s core earnings per share declined by 27.8% to Kshs 15.5, from Kshs 21.4 in Q3’2019, which was not in line with our expectation of a 41.2% decline to Kshs 12.6 per share. The variance was mainly attributable to the 4.4% rise in total operating income, against our expectations of an 8.9% decline. The bank’s performance was driven by the 30.4% rise in total operating expenses, which outweighed the 4.4% increase in total operating income,Key take-outs from the earnings release include;
For a comprehensive analysis, please see our Diamond Trust Bank Kenya Q3’2020 Earnings Note
III. Stanbic Bank
Stanbic Bank Q3’2020 Key Highlights |
|||
Balance Sheet |
|||
Balance Sheet Items |
Q3’2019 (Kshs bn) |
Q3’2020 (Kshs bn) |
y/y change |
Government Securities |
27.0 |
55.1 |
103.8% |
Net Loans and Advances |
161.7 |
158.9 |
(1.8%) |
Total Assets |
294.3 |
317.8 |
8.0% |
Customer Deposits |
191.3 |
226.0 |
18.2% |
Deposits per Branch |
7.4 |
8.7 |
18.2% |
Total Liabilities |
256.5 |
277.5 |
8.2% |
Shareholders’ Funds |
37.8 |
40.3 |
6.6% |
Income Statement |
|||
Income Statement Items |
Q3’2019 (Kshs bn) |
Q3’2020 (Kshs bn) |
y/y change |
Net Interest Income |
9.6 |
8.9 |
(7.3%) |
Net non-Interest Income |
8.8 |
7.2 |
(18.2%) |
Total Operating income |
18.4 |
16.1 |
(12.5%) |
Loan Loss provision |
(1.7) |
(2.9) |
70.6% |
Total Operating expenses |
(11.7) |
(10.7) |
(8.5%) |
Profit before tax |
5.9 |
5.4 |
(8.5%) |
Profit after tax |
5.1 |
3.6 |
(30.1%) |
Core EPS |
12.2 |
9.0 |
(30.1%) |
Key Ratios |
|||
Ratios |
Q3’2019 |
Q3’2020 |
% point change |
Yield on Interest Earning Assets |
8.2% |
5.6% |
(2.6%) |
Cost of Funding |
2.5% |
2.4% |
(0.1%) |
Net Interest Margin |
7.3% |
5.9% |
(1.4%) |
Non-Performing Loans (NPL) Ratio |
10.9% |
12.3% |
1.4% |
NPL Coverage |
58.9% |
61.8% |
2.9% |
Cost to Income with LLP |
63.5% |
66.3% |
2.8% |
Loan to Deposit Ratio |
84.6% |
70.3% |
(14.3%) |
Cost to Income Without LLP |
54.4% |
48.1% |
(6.3%) |
Return on Average Assets |
22.3% |
12.0% |
(10.3%) |
Return on Average Equity |
2.9% |
1.8% |
(1.1%) |
Equity to Assets Ratio |
12.8% |
12.7% |
(0.1%) |
Capital Adequacy Ratios |
|||
Ratios |
Q3’2019 |
Q3’2020 |
% point change |
Core Capital/Total Liabilities |
17.2% |
17.1% |
(0.1%) |
Minimum Statutory ratio |
8.0% |
8.0% |
0.0% |
Excess / Deficit |
9.2% |
9.1% |
(0.1%) |
Core Capital/Total Risk Weighted Assets |
13.9% |
15.5% |
1.6% |
Minimum Statutory ratio |
10.5% |
10.5% |
0.0% |
Excess / Deficit |
3.4% |
5.0% |
1.6% |
Total Capital/Total Risk Weighted Assets |
17.2% |
17.7% |
0.5% |
Minimum Statutory ratio |
14.5% |
14.5% |
0.0% |
Excess / Deficit |
2.7% |
3.2% |
0.5% |
Key take-outs from the earnings release include;
For a comprehensive analysis, please see our Stanbic Bank Kenya Q3’2020 Earnings Note
Asset Quality:
Bank |
Q3’2019 NPL Ratio |
Q3’2020 NPL Ratio |
Q3’2019 NPL Coverage |
Q3’2020 NPL Coverage |
KCB Group |
8.3% |
15.3% |
56.5% |
58.5% |
NCBA Group |
12.4% |
14.1% |
60.2% |
58.3% |
Standard Chartered Bank Kenya |
14.9% |
14.8% |
77.0% |
78.2% |
Co-operative Bank of Kenya |
10.5% |
13.2% |
55.5% |
50.1% |
Stanbic Bank |
10.9% |
12.3% |
58.9% |
61.8% |
Equity Group |
8.4% |
10.8% |
45.8% |
52.0% |
Diamond Trust Bank |
8.9% |
8.7% |
48.0% |
62.5% |
ABSA Bank Kenya |
6.8% |
7.6% |
78.6% |
64.9% |
Mkt Weighted Average |
9.8%** |
12.5%* |
57.8%** |
58.7%* |
*Market cap weighted as at 27/11/2020 **Market cap weighted as at 29/11/2019 |
Key take-outs from the table include;
The table below highlights the performance of the banks that have released so far, 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 |
NCBA |
(67.3%) |
4.8% |
4.1% |
5.3% |
3.2% |
11.8% |
48.7% |
47.7% |
8.1% |
12.5% |
63.0% |
0.4% |
3.9% |
ABSA |
(65.4%) |
1.4% |
0.8% |
1.6% |
7.1% |
4.5% |
32.7% |
(10.7%) |
4.7% |
13.1% |
84.9% |
7.8% |
15.2% |
KCB |
(43.2%) |
23.0% |
20.8% |
23.7% |
7.8% |
1.5% |
30.8% |
(14.2%) |
31.7% |
83.9% |
74.7% |
18.7% |
13.1% |
SCBK |
(30.4%) |
(5.8%) |
(17.3%) |
(2.4%) |
7.0% |
(8.8%) |
31.1% |
(9.7%) |
8.0% |
7.6% |
54.2% |
11.2% |
12.9% |
Stanbic |
(30.2%) |
(5.4%) |
(3.1%) |
(7.3%) |
5.9 |
(18.4%) |
44.5% |
(33.3%) |
18.2% |
103.8% |
70.3% |
7.5% |
12.0% |
DTB-K |
(27.80%) |
(3.4%) |
(8.9%) |
0.9% |
5.5% |
15.3% |
26.6% |
17.7% |
1.8% |
5.1% |
71.4% |
7.1% |
9.2% |
Equity |
(13.9%) |
21.7% |
21.6% |
21.8% |
7.6% |
10.1% |
38.7% |
(1.3%) |
44.5% |
37.2% |
65.7% |
30.1% |
16.9% |
CO-OP |
(10.2%) |
7.1% |
(3.5%) |
11.7% |
8.0% |
(3.5%) |
36.5% |
(31.7%) |
16.4% |
50.5% |
75.7% |
5.7% |
16.4% |
Q3'20 Mkt Weighted Average* |
(32.7%) |
11.4% |
8.1% |
12.6% |
7.1% |
2.3% |
35.9% |
(7.9%) |
24.1% |
45.7% |
64.9% |
15.5% |
13.8% |
Q3'19Mkt Weighted Average** |
8.7% |
4.5% |
4.3% |
4.9% |
7.7% |
15.8% |
37.9% |
22.6% |
11.0% |
3.3% |
75.7% |
11.6% |
19.3% |
*Market-cap-weighted as at 27/11/2020 |
|||||||||||||
**Market-cap-weighted as at 29/11/2019 |
Key takeaways from the table above include:
Universe of Coverage:
We are currently reviewing our target prices for the Banking Sector coverage.
Company |
Price at 20/11/2020 |
Price at 27/11/2020 |
w/w change |
YTD Change |
Year Open |
Target Price* |
Dividend Yield |
Upside/ Downside** |
P/TBv Multiple |
Recommendation |
Kenya Reinsurance |
2.1 |
2.1 |
0.0% |
(30.0%) |
3.0 |
4.0 |
5.2% |
93.9% |
0.2x |
Buy |
Sanlam |
11.6 |
11.0 |
(5.2%) |
(36.0%) |
17.2 |
18.4 |
0.0% |
67.3% |
1.2x |
Buy |
Liberty Holdings |
7.5 |
7.5 |
0.0% |
(27.5%) |
10.4 |
9.8 |
0.0% |
30.7% |
0.6x |
Buy |
Britam |
7.5 |
7.2 |
(3.7%) |
(20.0%) |
9.0 |
8.6 |
3.5% |
22.9% |
0.8x |
Buy |
Jubilee Holdings |
266.0 |
280.0 |
5.3% |
(20.2%) |
351.0 |
313.8 |
3.2% |
15.3% |
0.5x |
Accumulate |
CIC Group |
2.1 |
2.1 |
(0.5%) |
(23.1%) |
2.7 |
2.1 |
0.0% |
1.9% |
0.7x |
Lighten |
*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 equities for investors because, despite the sustained price declines, which have seen the market P/E decline to below its historical average presenting investors with attractive valuations in the market. The economic outlook remains grim.
I. Residential Sector
During the week, Hydro Developers Limited, a real estate developer based in Nairobi, partnered with the Kenyan government for the construction of approximately 30,489 affordable units under the Big Four Agenda, at a cost of Kshs 3.0 bn. The project dubbed Hydro City, will sit on a 302acre piece of land in Kamiti area along the Northern Bypass Road in Kiambu County. The project will comprise of 10,166 studio units of 31 SQM, 9,384 one-bedroom units of 45 SQM, 6,256 two-bedroom units of 62 SQM and 4,692 three-bedroom units of 91 SQM (specific unit prices are yet to be disclosed). Kiambu County is one of the areas that the government enlisted that will be used in the implementation of the affordable housing projects, others being, Machakos County, Lang’ata Sub-County and Starehe Sub-County. Focus on Kiambu county is mainly supported by; i) positive demographics having recorded a population growth of rate 48.9% from 1,623,282 in 2009 to 2,417,735 in 2019 according to the population and housing censure report by the Kenya National Bureau of Statistics (KNBS), ii) relatively good transport network as the area is served by the Northern Bypass, Thika Super Highway and Kamiti Road, iii) availability of land in bulk, and, iv) recognition of Kiambu as Nairobi’s dormitory thus hosting a huge working class population.
Hydro City will be the third Public Private Partnership (PPP) project under the affordable housing initiative, with some of the other projects being River Estate Project in Ngara being developed by Edermann Property Limited, and Pangani Housing Project in Pangani by Tecnofin Kenya Limited. The above partnership is an indication that the government continues to enlist the help of the private sector for development and financing of affordable housing with aim of achieving its target of approximately 500,000 housing units by 2022. However, so far PPPs have not been achieved their full potential due to their ineffectiveness resulting from;
Nevertheless, in our view, the partnership is a stride in the right direction and will drive the supply of affordable housing which is currently lagging behind on its target number of housing units having only delivered approximately 228 housing units so far through the Park Road affordable housing Project in Ngara. Key to note, in some developed countries the private sector developers were key players in resolving the country’s housing deficit, casing point Singapore. It is therefore important for the Kenyan government reviews the current PPP structure to make it more favourable to private developers and thus boost the achievement of the Big Four Agenda on provision of affordable housing.
II. Retail
During the week, Naivas, a local retail chain opened 2 branches one in Hazina towers in Nairobi CBD taking up space previously occupied by Nakumatt Lifestyle and House of Leather which relocated to another location, and the other at Ananas Mall in Thika Town taking up space left behind by struggling retailer, Tuskys . This brings the total number of outlets by the retailer to 68 with 7 outlets opened during this year. The move by the retailer to open the branch in the Nairobi CBD is supported by the relatively high footfall within the CBD and ease of accessibility. On the other hand, the investment in Thika is supported by; i) positive demographics with Thika West having a population of 245,820 as of 2019, a 12.8% growth from the 218,544 recorded in 2009, according to the Kenya National Bureau of Statistics (KNBS) Population and housing census report, iii) a growing middle class with increased consumer purchasing power, and iii) accessibility with the area being served by the Thika Super Highway.
The continued expansion of the local retailer, taking up space left behind by struggling counter parts continues to cushion the real estate retail sector which has continued to feel the pressure of the tough economic environment due to i) reduced demand for retail space as some retailers halt operations to cushion themselves from the effects of the pandemic, ii) reduced revenues amid reduced disposable income among consumers, iii) the shift to e-commerce, and, iv) the existing oversupply in some cities such as Nairobi with a surplus of 3.1 mn SQFT retail space thus resulting in pressure on landlords to provide concessions and other incentives to attract new clientele or retain existing tenants. In terms of performance, according to Cytonn’s Kenya Real Estate Retail Sector Report 2020, the Kenya retail sector recorded subdued performance with the rental yield coming in at 6.7%, 0.3% point lower than 7.0% recorded in 2019. Mt Kenya Region which includes Thika, Meru, Nyeri and Nanyuki was the best performing urban city recording an average rental yield of 7.7%, while Nairobi Metropolitan Area was ranked second with an average rental yield at 7.5%.
The table below shows a summary of 2020 retail performance in key urban cities in Kenya;
(All values in Kshs unless stated otherwise)
Summary of Retail Performance in Key Urban Cities in Kenya |
|||
Region |
Rent/SQFT 2020 |
Occupancy% 2020 |
Rental Yield 2020 |
Mount Kenya |
125.0 |
78.0% |
7.7% |
Nairobi |
168.5 |
74.5% |
7.5% |
Mombasa |
114.4 |
76.3% |
6.6% |
Kisumu |
97.2 |
74.0% |
6.3% |
Eldoret |
130.0 |
80.2% |
5.9% |
Nakuru |
55.7 |
76.6% |
5.9% |
Average |
115.1 |
76.6% |
6.7% |
Source: Cytonn Research
The table below shows the summary of the number of stores of the key local and international retail supermarket chains in Kenya;
Main Local and International Retail Supermarket Chains |
||||||
Name of Retailer |
Initial number of branches |
Number of branches opened in 2020 |
Closed branches |
Current number of Branches |
Branches expected to be opened / closed |
Projected total number of branches |
Naivas Supermarket |
61 |
7 |
0 |
68 |
2 |
70 |
Tuskys |
64 |
2 |
14 |
52 |
27 |
25 |
QuickMart |
29 |
6 |
0 |
35 |
0 |
35 |
Chandarana Foodplus |
19 |
1 |
0 |
20 |
0 |
20 |
Carrefour |
7 |
1 |
0 |
8 |
3 |
11 |
Uchumi |
37 |
0 |
33 |
4 |
0 |
4 |
Game Stores |
2 |
1 |
0 |
3 |
0 |
3 |
Choppies |
15 |
0 |
13 |
2 |
0 |
2 |
Shoprite |
4 |
0 |
2 |
2 |
0 |
2 |
Nakumatt |
65 |
0 |
65 |
0 |
0 |
0 |
Total |
303 |
18 |
127 |
194 |
32 |
172 |
Source: Online research
III. Infrastructure
During the week, Kenya Urban Roads Authority (KURA) announced plans to construct two elevated carriage ways in the Nairobi Central Business District (CBD). The Kshs 2.9 bn project which has been assigned to China Road and Bridge Corporation will take shape after the completion of the Nairobi Expressway which is currently under construction by the Kenya National Highways Authority (KENHA), and is expected to be completed by 2023. The carriage ways are expected to be along Valley Road-Kenyatta Avenue junction around Integrity Centre through to the CBD, and Nyerere Road interchange through to UpperHill-Haile Selassie Avenue. One of the carriage ways will be from Integrity Centre to Serena Hotel and the other one will be on the Milimani Close. The two overpasses are intended to link Ngong Road to the CBD. The overpass will be designed to approach the Nairobi Express way at the lower levels thus easing traffic into the CBD through the Kenyatta Avenue and Haile Selassie Avenue.
The implementation of infrastructural projects in Kenya has been affected by the reduced budget allocation through the National Budget to the infrastructural sector. For financial year 2020/2021, the sector was allocated Kshs 172.4 bn, 60.4% lower than the 435.1 bn allocated in the 2019/2020 budget. This is the lowest allocation in the last 10 financial years attributed to a projected revenue shortfall brought about by slowdown in the economy due to disruptions by the COVID-19 pandemic which prompted diversion of funds towards mitigation of the pandemic. Despite the reduced budget allocation, we expect the government to continue with the implementation of selected infrastructural projects thus opening up areas for development hence boosting the real estate sector. On completion, we expect the carriage ways to result in reduced traffic congestion in and out of the CBD thus making it more attractive to real estate investors. Other infrastructural projects underway include the Nairobi Express way, Nairobi-Western Bypass, Lamu Port and Lamu-Southern Sudan-Ethiopia Transport Corridor Project (LAPSSET), and, Mombasa Port Development Project.
We expect the real estate sector to record activities supported by continued implementation of infrastructural projects by the government thus opening up areas for investment, focus on affordable housing which is expected to boost the performance of the residential sector and the ongoing expansion of local retailers which is expected to cushion the performance of the retail sector.
Following the continued depreciation of the Kenya Shilling against the US Dollar and various sentiments being raised in the recent past with regards to currency manipulation, we decided to do a note to demystify the various currency regimes, the mechanisms under which they operate, and how countries use them to ensure currency stability. We shall also focus on the various techniques used to estimate the value of a currency and the factors that have been driving the downward performance of the Kenya shilling.
In our focus on Currency and Interest Rates, where we looked at the factors that were expected to affect the performance of the Kenyan shilling against the US Dollar. We expected the currency and the interest rates to remain under pressure with the currency depreciation to continue. This mainly because of the predicted reduction in export inflows as some of Kenya’s key trading partners had instituted lockdown measures, as well as, a decline in diaspora remittances;
In this focus we shall cover the following:
Section I: A Brief History of Currency Regimes
An exchange rate can be widely defined as the value of one currency for the purpose of conversion to another. An example, how many Kenyan shillings you would need to acquire one US Dollar. However, just like in the exchange of goods and services, we must take into account what determines that price. As such, the monetary authority of a country or currency union manages the currency in relation to other currencies and the foreign exchange market through exchange rate regimes which are the frameworks under which the price is determined.
Initially, most countries used the gold standard whose value was directly linked to gold and the money supply was tied to their trade balance; but in the 1930s, most countries abandoned it for the Bretton Woods model due to decline in global trading activities. Under this model, the value of the US dollar was pegged on Gold and all the other currencies were pegged on the value of the US dollar.
An ideal currency regime would have three characteristics. First, all the currencies would be freely exchangeable for any purpose and any amount thus ensuring the free flow of capital. Second, the exchange rate between any two currencies would be fixed to eliminate currency-related uncertainties, especially for goods and services. Third, each country would be free to pursue independent monetary policy objectives.
Types of Currency Regimes across the World:
There are three broad exchange regimes used by various governments across the world, these three regimes as explained in depth in our understanding currency regimes note. This include:
It is difficult to maintain the three conditions for an ideal currency regime, therefore each country chooses the regime that suits their policy objectives. Previously, there have been instances where a country has switched from one regime to another. Here is a look at examples of countries that have shifted their exchange regimes over the years;
Section II: How to Determine the Value of a Currency
One would then ask how you estimate the exchange rate between 2 countries and the value of the country’s currency. The most widely used methods are:
With countries trying to implement various exchange rates the question of finding the true value of a currency then comes in. Currency manipulation has been one of the most controversial economic issues in the limelight for the past years. Central banks across the world have been accused of managing the value of their currency during their routine interventions to counter monetary shocks. Currency manipulation is the artificial lowering of a country’s currency value that provides it with an unfair advantage of lowering the cost of their exports. The US produces a bi-annual report identifying countries that are classified as manipulators. In 2019, the US accused China of manipulation but later withdrew the claims. Currently, the IMF has developed guidelines on identification and control of currency manipulation. However, it faces challenges in implementation and is still looking at the best way to deal with manipulators.
Factors that affect the performance of the currency
Section III: Kenya's Foreign Exchange Market and Recent Events
Since independence, the Kenyan exchange rate has undergone various regime shifts, which have mainly been attributed to economic events. From independence to 1974, the rate was pegged to the dollar, which later shifted to a crawling peg after a series of devaluations, then it became fully liberalized in 1993. The current exchange rate regime is free-floating in nature and is determined by the market forces of demand and supply. However, the Central Bank of Kenya frequently participates in the foreign exchange market when; it needs to curtail volatility originating from external shocks, build stocks of foreign reserves, effect government payments and regulate liquidity in the market.
During a country review report released in 2018, the IMF suggested that the Kenyan exchange rate was overvalued by 17.5%. This was attributed partly to CBK engaging in periodic foreign exchange interventions, reflecting the limited movement of the shilling relative to the US dollar. The Central Bank of Kenya (CBK) governor, Dr. Patrick Njoroge, however, refuted the claims in a media briefing, coming out to clarify that the Central Bank does interventions in the market which can be seen as manipulations but they were actions that fall within the purview of the bank. Recently, there were also suggestions that the US had cautioned the Kenyan government against currency manipulation, a fact that the Governor clarified that it is a clause the US government includes in all its trade negotiations.
At the start of 2020 the Kenyan Shilling was exchanging at Kshs 101.4 against the US Dollar but due to the effects of COVID-19 weighing down on the economy the shilling has since depreciated by 8.4% to close at Kshs 109.9 at 27th November 2020 as highlighted in the chart below:
The recent performance of the shilling has been affected by:
Our in- house view is that the shilling will remain under pressure and we expect it to trade against the dollar at a range of Kshs 107.5- 109.5 in the short term. We expect the shilling to be cushioned from further shocks by:
Section IV: Conclusion and Recommendations going forward
Determining the “true value” of a currency can be challenging given the various models used and the fact that countries have diverse economic dynamics and challenges.
The continued depreciation of the Kenyan shilling is expected to have the following effects to the economy;
The figure below shows Kenya’s debt composition as of June 2020 with 55.2% of the total debt being foreign borrowing:
However, the government has also indicated on a possibility of joining the Debt Service Suspension Initiative (DSSI), aimed at allowing low-income countries to concentrate resources on fighting the pandemic. The ministry has also indicated that joining the initiative could save the country around Kshs 70-75 bn in interest payments.
2. Making imports more expensive: Kenya is a Net importer meaning that Kenya Imports more than it exports goods and services, therefore further depreciation will make the imports more expensive and with the current account deficit improving in will see the importers spend more to bring commodities into the country. The adjustment in Kenya’s price levels relative to those of its trading partners is however expected to be positive in helping the economy adjust to the COVID-19 shock and stage a recovery, by increasing the international competitiveness of goods and services produced in Kenya.
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.