Apr 15, 2018
Following the release of the FY’2017 results by Kenyan listed banks, the Cytonn Financial Services Research Team undertook an analysis on the Kenyan Banking Sector to point out any material changes from our Q3’2017 Banking Report. In our FY’2017 Banking Report, we analyze the results of the listed banks in order to determine which banks are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective.
The report is themed “Diversification and efficiency key to growth amidst tighter regulation” as we assess what factors will be crucial for the sustainability of the banking sector, with banks adjusting their business models in an effort to manage increased regulation and the tougher business environment. As a result, we seek to answer the question, “What must banks focus on going forward?”, as we look forward to a relatively challenging operating environment for the banking sector due to (i) IFRS 9 having coming into effect in 2018, and (ii) the interest rate caps. We expect more emphasis on alternative revenue streams by banks to non-funded income as they work on their efficiency.
Below are the 6 key themes that shaped the banking sector over 2017:
Below is a summary of the branches closed and staff laid off over the last one year as the banks seek efficiency:
Kenya Banking Sector Restructuring |
|||
|
Bank |
Staff Retrenchment |
Branches Closed |
1. |
Sidian Bank |
108 |
- |
2. |
Equity Group |
400 |
7 |
3. |
Ecobank |
- |
9 |
4. |
Family Bank |
Unspecified |
- |
5. |
First Community Bank |
106 |
- |
6. |
Bank of Africa |
- |
12 |
7. |
National Bank |
150 |
- |
8. |
NIC Bank |
32 |
Unspecified |
9. |
Standard Chartered Bank Kenya |
300 |
4 |
10. |
KCB Group |
223 |
Unspecified |
11. |
Barclays Bank |
301 |
7 |
12. |
I&M Holdings |
- |
Unspecified |
|
TOTAL |
1,620 |
39 |
Below is the summary of the transaction metrics of some of the acquisitions that have happened in the banking sector, including DTBK’s acquisition of Habib Bank Kenya.
Acquirer |
Bank Acquired |
Book Value at Acquisition (Kshs bn) |
Transaction Stake |
Transaction Value (Kshs bn) |
P/BV Multiple |
Date |
Diamond Trust Bank Kenya |
Habib Bank Limited Kenya |
2.4 |
100.0% |
1.8 |
0.8x |
Mar-17 |
SBM Holdings |
Fidelity Commercial Bank |
1.8 |
100.0% |
2.8 |
1.6x |
Nov-16 |
M Bank |
Oriental Commercial Bank |
1.8 |
51.0% |
1.3 |
1.4x |
Jun-16 |
I&M Holdings |
Giro Commercial Bank |
3.0 |
100.0% |
5.0 |
1.7x |
Jun-16 |
Mwalimu SACCO |
Equatorial Commercial Bank |
1.2 |
75.0% |
2.6 |
2.3x |
Mar-15 |
Centum |
K-Rep Bank |
2.1 |
66.0% |
2.5 |
1.8x |
Jul-14 |
GT Bank |
Fina Bank Group |
3.9 |
70.0% |
8.6 |
3.2x |
Nov-13 |
Average |
80.3% |
1.8x |
Based on the above, we believe the sector is shaping up to a more diversified banking model and prudence in operations, as can be seen through the increase in alternative channels and restructuring in the sector, as banks adjust to the business environment and the current regulatory framework.
Below is a summary of the FY’2017 results for the eleven listed banks and key take-outs from the results:
Listed Banks FY'2017 Earnings and Growth Metrics |
|||||||||||
Bank |
Core EPS Growth (%) |
Interest Income Growth (%) |
Interest Expense Growth (%) |
Net Interest Income Growth (%) |
Net Interest Margin (%) |
Non-Funded Income (NFI) Growth (%) |
NFI to Total Operating Income (%) |
Growth in Total Fees& Commissions (%) |
Deposit Growth (%) |
Loan Growth (%) |
Growth in Govt. Securities (%) |
NBK |
479.0 |
(17.7) |
(24.9) |
(13.7) |
7.4 |
(15.0) |
26.5 |
(1.2) |
0.4 |
0.4 |
(4.8) |
Equity Group |
14.0 |
(6.6) |
8.1 |
(10.2) |
9.0 |
24.2 |
42.0 |
22.0 |
10.7 |
4.9 |
27.3 |
KCB Group |
(0.1) |
1.4 |
(3.1) |
2.9 |
8.7 |
2.5 |
32.2 |
16.4 |
11.5 |
9.6 |
7.4 |
Stanbic |
(2.5) |
(3.0) |
(5.3) |
(2.0) |
5.2 |
10.0 |
44.2 |
38.6 |
24.1 |
8.1 |
42.6 |
NIC Group |
(4.3) |
(3.2) |
11.5 |
(11.5) |
6.3 |
3.6 |
27.9 |
14.2 |
24.2 |
4.6 |
77.9 |
Barclays Bank |
(6.4) |
(3.4) |
(7.2) |
(2.4) |
9.7 |
(9.5) |
27.9 |
8.6 |
12.5 |
(0.7) |
20.1 |
I&M Holdings |
(7.1) |
(0.1) |
0.0 |
0.6 |
7.8 |
15.9 |
27.0 |
22.0 |
15.5 |
13.6 |
10.9 |
Co-op Bank |
(10.0) |
(4.5) |
(3.9) |
(4.7) |
9.2 |
5.6 |
32.4 |
0.3 |
9.2 |
7.1 |
19.7 |
DTBK |
(10.3) |
2.4 |
3.6 |
1.5 |
6.5 |
4.1 |
21.1 |
5.3 |
11.8 |
5.2 |
23.3 |
Stanchart |
(24.0) |
1.9 |
20.3 |
(4.1) |
8.4 |
2.3 |
32.1 |
(0.4) |
14.3 |
2.9 |
26.7 |
HF Group |
(86.1) |
(17.1) |
(11.1) |
(24.3) |
5.2 |
78.2 |
31.1 |
(37.6) |
(3.7) |
(8.9) |
(44.0) |
Weighted Average** |
(1.0%) |
(2.4%) |
2.6% |
(3.8%) |
8.4% |
9.1% |
33.6% |
13.4% |
12.5% |
6.1% |
22.2% |
Weighted 2016 Average |
4.4% |
15.5% |
6.2% |
20.3% |
9.2% |
2.4% |
31.0% |
12.6% |
6.4% |
6.3% |
45.8% |
Key takeaways from the table above include:
Private sector credit growth continues to remain low, coming in at 2.1% in February 2018, way below the government set target of 18.3%, as banks channel funds more actively towards government securities, depriving the private sector of credit.
Rate cap came into effect in August 2016 when private sector credit growth was at 5.4% as highlighted above, with the decline before that as a result of a challenging operating environment
Following the challenges that the banking sector has been facing, primarily (i) the deteriorating asset quality brought about by a challenging operating environment, and (ii) the capping of interest rates, which has led to decreased profitability by banks in 2017, as private sector remains subdued, we believe the key factors banks will consider going into 2018 are diversification, prudency and efficiency. Banks will have to diversify their income sources to more fee-income business, be prudent in loan disbursement, as well as enhancing their risk assessment framework, coupled with efficiency, in a bid to protect their profit margins. The challenging operating environment is further underpinned by the coming into effect of IFRS 9 and Basel III, which will require banks to embrace both prudence and efficiency in order to be compliant and enhance profitability, which we believe will lead to a more stable and robust sector.
As per our analysis on the banking sector, from a franchise value and from a future growth opportunity perspective, we carried out a comprehensive ranking of the listed banks. For the franchise value ranking, we included the earnings and growth metrics in the table above as well as the operating metrics in the table below in order to carry out a comprehensive review of the banks.
Listed Banks FY’2017 Operating Metrics |
|||||||
Bank |
LDR |
CIR |
ROACE |
Deposits per Branch (bns) |
Gross NPL Ratio |
NPL Coverage |
Tangible Common Ratio |
Co-operative Bank |
88.3% |
60.9% |
15.9% |
1.9 |
7.2% |
37.6% |
17.6% |
KCB Group |
84.6% |
59.2% |
19.5% |
1.9 |
8.4% |
67.9% |
15.9% |
Diamond Trust Bank |
73.6% |
59.6% |
13.9% |
1.9 |
7.2% |
67.5% |
13.0% |
Equity Group |
74.8% |
58.7% |
21.6% |
1.3 |
6.2% |
50.3% |
16.6% |
I&M Holdings |
90.4% |
56.2% |
17.9% |
4.0 |
12.1% |
40.0% |
18.5% |
NIC Group |
86.2% |
62.5% |
12.9% |
3.0 |
11.9% |
45.7% |
16.0% |
Barclays Bank |
90.5% |
65.8% |
16.0% |
2.1 |
7.1% |
70.0% |
15.9% |
Standard Chartered |
59.2% |
63.2% |
16.5% |
4.8 |
12.8% |
74.4% |
15.3% |
Stanbic Holdings |
74.1% |
71.7% |
10.4% |
5.5 |
7.0% |
47.4% |
13.5% |
HF Group |
135.4% |
92.3% |
1.1% |
1.5 |
15.6% |
36.4% |
15.6% |
National Bank |
55.5% |
91.4% |
5.8% |
1.3 |
40.6% |
57.1% |
5.6% |
Weighted Average |
80.0% |
61.1% |
17.6% |
2.4 |
8.3% |
56.4% |
16.1% |
The overall ranking was based on a weighted average ranking of Franchise value (accounting for 40%) and Intrinsic value (accounting for 60%). The Intrinsic Valuation is computed through a combination of valuation techniques, with a weighting of 75.0% on Discounted Cash-flow Methods and 25.0% on Relative Valuation, while the Franchise ranking is based on banks operating metrics, meant to assess the efficiency, asset quality, diversification, corporate governance and profitability, among other metrics.
CYTONN’S FY’2017 BANKING REPORT – COMPOSITE RANKINGS |
|||||
Bank |
Franchise Value Total Score |
Intrinsic Value Score |
Weighted Score |
FY‘2017 Rank |
Q3‘2017 Rank |
KCB Group |
53.0 |
3.0 |
23.0 |
1 |
1 |
Equity Group |
55.0 |
8.0 |
26.8 |
2 |
4 |
I&M Holdings |
68.0 |
4.0 |
29.6 |
3 |
7 |
Co-operative Bank |
66.0 |
6.0 |
30.0 |
4 |
2 |
NIC Bank |
74.0 |
1.0 |
30.2 |
5 |
5 |
Barclays Bank |
71.0 |
5.0 |
31.4 |
6 |
3 |
Diamond Trust Bank |
78.0 |
2.0 |
32.4 |
7 |
6 |
Standard Chartered Bank |
77.0 |
11.0 |
37.4 |
8 |
9 |
Stanbic Holdings |
85.0 |
9.0 |
39.4 |
9 |
8 |
National Bank of Kenya |
111.0 |
11.0 |
48.6 |
10 |
10 |
HF Group |
117.0 |
10.0 |
52.8 |
11 |
11 |
Major changes include:
For a comprehensive analysis on the ranking and methodology behind it, see our Cytonn FY’2017 Banking Sector Report.
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.