In July, two renowned South African investment advisors, SBG Securities and BPI Capital Africa, recommended "buy" and "hold" respectively for Bank of Kigali (BK) shares trading on the Rwanda Stock Exchange (RSE).
And recently, Renaissance Capital, a leading investment banking firm reaffirmed this position with a "buy" recommendation on the shares of Rwanda's biggest commercial bank.
'Hold' is a neutral recommendation that is higher than 'sell' but lower than 'buy.'
A 'buy,' recommendation is the best any company listed on a stock exchange can get.
When SBG placed a "buy" tag on BK shares two months ago, it envisaged good risk management and growth in non-interest income propelling the bank's return on equity (amount of money made by each share held in the business) to a record high of 35 per cent from the current 20 per cent.
It sounded way too far from reality for a bank operating in a competitive market whose industry average is in the range of 18 per cent.
Even with a "hold" tag, BPI Capital Africa also predicted 26 per cent increase on return on equity on account of recent injections of working capital.
That too, looked "quite overly optimistic" as an official from a rival bank who did not want to be named, pointed out.
Now in what could pass as a third opinion, Renaissance Capital, does not only forecast average return on equity of 22 per cent, but has also revised upwards its projections for the bank's net profit to Rwf14.8bn from Rwf14.1bn at the end of this year.
The upward revision, according to the Renaissance Capital, is based on the bank's stronger than expected performance in the first half the year during which period, BK posted net profit of Rwf7.3 billion due to strong growth in non-interest income. Non-interest income includes fees and commission charged for various financial services to clients. Moreover, this came even as net loans to customers fell by 1.5% during the second quarter of the year compared to the same period last year.
According to Renaissance Capital, BK will face more odds along the way, but they will not be significant enough to spoil the party at the end of the year. "On the downside, we expect slower deposit and loan growth plus higher impairment costs as the bank continues to raise its coverage ratio. However, we expect these downward pressures to be more than offset by higher [net interest margins], stronger [non-interest revenue] and slower cost," Renaissance says in an assessment report released on Sept. 23.
For that reason, Renaissance says it makes good business sense to buy BK shares at the current price of Rwf180 (as of mid. September ) because the price for the same shares is projected to rise to Rwf220 per share on account of expected good end of year balance sheet.
"We believe the bank is on course to deliver good earnings growth this year with improving returns. Medium- and longer-term growth will partly depend on BK's success in mobilising deposits in a cost effective manner. We retain our buy rating and raise our TP (trading price) to Rwf220 per share," Renaissance concluded. In their previous assessment, the firm projected BK's shares to trade at Rwf210 per share.
According to Renaissance Capital, BK has an uphill task of boosting customer deposits in its coffers so as to make available cheaper funds for growing its assets.
"Given that current and savings accounts tend to attract minimal interest rates, customer deposits provide a cheap source of funds. BK is no different, with customer deposits accounting for 80 per cent of Group liabilities and 64 per cent of total assets as at [first half of 2013]. The constraint, for BK, is that its LDR (loan/deposits ratio) is beginning to look stretched [versus] NBR [national bank of Rwanda] preferences and even guidelines set by the bank's board," Renaissance states. This however is industry-wide problem that started during the second half of 2012 when the government sought to borrow more from the public through sell of treasury bills. That saw the government compete with banks for cash as would be depositors opted to invest in the often lucrative government treasury bills and bonds.
The situation has since started to improve after the government quit the domestic market and capped its debt with the issuing of the $400 Euro bond.
As market leader, BK can still leverage its huge branch network that is backed by mobile vans and hundreds of agents to mobilise deposits by reaching out for billions of Francs still being held outside the formal financial system. "We cannot believe that deposit mobilisation has been exhausted in Rwanda. Banking penetration (banking assets/GDP) is still low at 29 per cent... . More importantly, deposit penetration is also low. We note that Kenya has the highest penetration at 50 per cent, while Rwanda is the lowest at 19 per cent. This suggests, to us, that a large percentage of the cash in the system is still being kept under the mattress, so to speak," Renaissance says.
John Bugunya, BK Chief Finance Officer, agrees. "We feel that given our market dominance and operating where banking assets to GDP are less than 35%, there is room for growth," he said