28 October 2010

Kenya: Co-Op Bank Share Price Slows After CIC Deal

Co-operative Bank's share price appeared to slow down after a one-month rally, which market analysts said was fuelled by Tuesday's announcement of purchase of an extra stake in CIC Insurance Company.

Co-operative Bank's shares have risen 28.5 per cent from Sh16.15 on September 7, to Tuesday's closing price of Sh20.75. In mid-morning trade on Wednesday, there was a demand for 600,000 shares of the Nairobi Stock Exchange (NSE) listed lender, at between Sh20 and Sh21.

Research analysts at African Alliance Investment Bank and Standard Investment Bank attributed the one-month rally to investor expectations about the CIC Insurance deal announced on Tuesday and its pending nine-month performance results.

"The market must have got wind of the deal with CIC Insurance," said analysts at African Alliance Investment Bank. Co-op Bank announced it had paid between Sh120 and Sh130 million to CIC Insurance, increasing its ownership stake from two to 25 per cent.

Co-op's price rally put the bank's price-to-earnings ratio relatively higher than peer NSE listed lenders. The bank's price-to-earnings ratio currently stands at 24.4, while other top tier banks such as Barclays have ratios of 15.5, Standard Chartered 16 and KCB 16.4.

Earnings expectations

Share prices of listed companies, especially banks, normally show a tendency to rise every quarter-end in anticipation of earnings announcements, but the analysts at African Alliance Analyst said Co-op Bank's price-to-earnings ratio would imply "massive" earnings expectations.

Mr Anthony Waweru, a dealer at Standard Investment Bank, said the investors are expecting strong results from the bank. This has had a big role in the one-month share price rally.

The bank's price has plateaud since Tuesday, which Mr Waweru says is a reflection that investors have factored in the bank's results expectations for the third quarter. Commercial banks have reported robust third quarter results, which have been driven by increased lending and a favourable economic climate.

Housing Finance posted 81 per cent growth in third quarter profitability, Equity Bank 51 per cent and KCB 23 per cent. Analysts expect Co-operative Bank, which has a captive client base of savings and credit societies, to follow suit. Mr Waweru termed Wednesday's Sh20 Sh21 range a "prime price" for investors who had the shares for speculation to cash in on the stock.

There has been a lack of supply in the market, which does not augur well for institutional and high net-worth individuals who buy the shares in huge blocks. The releasing of the shares by speculators at this price is likely to be mopped up by the investors.

Prospects for the bank, the analysts said, look promising following its entry into the insurance industry. The new partnership, according to the bank's chief executive officer, Mr Gideon Muriuki, is another step in plans to be a "financial supermarket" by increasing the services offered.

In 2008, the bank bought Bob Mathews Stockbrokers, which is its brokerage arm. The CIC deal is expected to sell insurance products through Co-op's banking channels. The bank plans to deepen ownership in CIC to leverage on huge customer numbers of the co-operative movement, said Mr Alex Muiruri, an analyst at Dyer and Blair Investment Bank.

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