Cytonn’s Q1 2015 Banking Report

Jun 28, 2015

Our private equity business includes three main businesses, traditional PE, PIPE and QPE:

  • Traditional private equity attracts private capital into private businesses using either pooled or deal by deal PE fund structures;
  • Public investments into private entities, (“PIPE”), attracts public capital into private companies, and
  • Quoted private equity, (“QPE”), attracts private capital into public / listed businesses such as listed banks.

As part of our QPE business, we periodically do research reports for our global markets PE clients looking to invest in the region. This report looks at the relative long-term attractiveness of the listed banks as an investment.

We have tried to answer the question, from an investor point of view: which is the most attractive listed bank to invest in for the long-term?

In Kenya there are a total of 43 commercial banks, 10 microfinance banks and 1 mortgage finance institution. The Central Bank of Kenya regulates all banks. The Capital Markets Authority has additional oversight over the listed banks, which are 11 in number.

Kenya has a high relative ratio of banks to the total population, with the 43 commercial banks serving a country of 44 million people, compared with Nigeria's 22 banks for 180 million inhabitants and South Africa has 19 banks for 55 million.

Over the last few years, the banking sector in Kenya has continued to grow in assets, deposits, profitability and products offering. The banking sector’s aggregate balance sheet grew by 3.4% from Kshs 3.26 trillion in December 2014 to Kshs 3.37 trillion in March 2015.

The analysis covers the long-term investment / franchise attractiveness of the bank by looking at 12 different metrics, namely:

  1. Net interest margin: We used the net interest margin as a bank’s measure of core profitability;
  2. Return on average common equity: We used the return on average common equity as a measure of profitability that flows to equity holders;
  3. Price/earnings growth ratio: We used the price/earnings growth ratio to determine relative valuation considering each bank’s expected growth rates;
  1. Loans to deposit ratio: We used the loans to deposit ratio as a bank’s measure of liquidity;
  2. Cost to income ratio: We used the cost to income ratio as a bank’s measure of efficiency;
  3. Deposits per branch: We used a bank’s deposits per each branch as a measure of efficiency and proficiency in deposit gathering;
  4. Price to tangible book value: We used a bank’s price to tangible book value as a measure of relative valuation;
  5. Tangible common equity ratio: We used the tangible common equity ratio as a measure of a bank’s permanent capitalization levels;
  6. Non-performing loans to total loans ratio: We used a bank’s non-performing loans to total loans ratio as a measure of a bank’s asset quality and credit risk;
  7. Reserves to non-performing loans: We used a bank’s reserves to non-performing loans as a measure of a bank’s asset quality and credit risk;
  8. Non-interest income to revenue: We used the ratio of non-interest income to revenue as a measure of a bank’s revenue diversification;
  9. Camel rating: We used our own camel rating system to assess the overall safety and soundness of the banks;

Based on these metrics, below is the ranking of the 11 listed banks:

Key Banking Metrics


Total Score Rank

CfC Stanbic



I&M Bank



Standard Chartered



Equity Bank






Diamond Trust Bank



Co-operative Bank



NIC Bank



Barclays Bank



National Bank of Kenya



Housing Finance



From our analysis, the bank that is likely to deliver the best return over the long-term, 3 to 5 years, and which has the best franchise value is CFC Stanbic. The worst performer is Housing Finance (HF), however, it is worth noting that HF is more of a mortgage finance specialty lender funded through expensive wholesale deposits and bonds, rather than a traditional bank, hence the poor ranking.

The full report with analysis across the 12 analysis metrics and how the 11 listed banks compare across the respective metrics is available for purchase at a cost of USD 1,250. In case you want to purchase a copy of the full report, kindly email or


Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.