Nairobi — KCB Group is the most attractive bank in Kenya a latest banking sector report has revealed, which now sees the lender retain the position for the third financial year.
The lender which has cemented operations in Kenya and the East Africa region is ranked first on the back of a high return on average equity of 21.9 per cent, compared to an industry average of 19.5 per cent.
According to the Cytonn Investments Half-One 2018 Banking Sector Report, KCB also has a high efficiency performance, with a Cost to Income Ratio of 52.0 per cent, compared to an industry average of 55.7 per cent.
It has retained this position since financial year 2016, supported by a strong franchise value and intrinsic value score.
Equity Group comes in second overall, though with the highest return on equity at 23.9 per cent.
During the first six months of the year, the lender which has also made inroads regionally had the second best Net Interest margin at 8.8 per cent, above the industry average of 8.1 per cent, and the third best efficient bank with a Cost to income Ratio of 52.8 per cent above the industry average of 55.7 per cent.
I&M Holdings comes third with a strong deposit growth of 30.6 per cent , the highest in the industry.
Co-operative Bank rose two positions to position four from position six in quarter one of this year, attributed to its optimal loan to deposit ratio of 84.6 per cent , above the industry average of 73.6 per cent.
The bank also had a relatively high net interest margin of 8.6 per cent above the industry average of 8.1 per cent, and the highest capitalization with a tangible common ratio of 16.8 per cent, above the industry average of 14.4 per cent.
The franchise score measures the broad and comprehensive business strength of a bank across 13 different metrics, while the intrinsic score measures the investment return potential.
The other lenders are Diamond Trust Bank Kenya at position five, Barclay Bank (six), Standard Chartered Bank (Kenya) at position seven, NIC Bank(8),Stanbic Holdings (9) and National Bank at position 10.
Housing Finance Group ranked lowest overall (11), ranking last in the Franchise value score.
Speaking during the launch of the survey, Cytonn Investments analyst Ian Kagiri noted that the Kenyan banking sector has fared relatively well in the face of a challenging operating environment, following the capping of interest rates, coupled with increasingly tighter regulation.
The report, themed 'Growth and Efficiency aided by Technology, amid deteriorating Asset Quality', analyzed the results of the listed banks using their H1'2018, unaudited results so as to determine which banks are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective.
"Banks will continue to put more emphasis on alternative revenue streams to boost their Non-Funded Income and adopt an efficient operating model through alternative banking channels and digitization in order to remain profitable under the tough operating environment of compressed margins," Kagiri said.
"We have looked at four key focus areas, which are regulation, diversification, technology and asset quality in this report. With a tighter regulatory environment following the capping of interest rates and adoption of IFRS 9, diversification of revenue, cost management and asset quality management will prove to be the key growth drivers for players banking sector," he added.
The banking sector is expected to record a recovery in earnings compared to 2017, buttressed by the ongoing economic recovery from the harsh operating environment experienced last year due to the general elections coupled with the prolonged drought.
Faith Maina, Investment Analyst at Cytonn noted that sffects of the aforementioned have spilled over to the current year, as shown by the deterioration in the industry's asset quality, largely attributed to several sectors such as manufacturing, retail and real estate.
" With the coming into effect of IFRS 9 in January 2018 which takes a forward-looking approach to credit assessment and provisioning requirements, banks with poor asset quality will likely witness a depletion of their capital bases as they have to set aside provisions for both the performing and non-performing loans." Maina said.
With the deteriorating asset quality, evidenced by the rising non-performing loans, banks are expected to continue employing prudent loan disbursement policies, and consequently tightening their credit standards, in order to address the concerns around asset quality, in a bid to protect their profitability.
"This poses a challenge, as it points to reduced intermediation in the banking sector, between the depositors and the credit consumers, one of the banking sector's main function. We have seen banks adjusting their business models with lending skewed mainly towards collateralized lending and working capital financing," Maina said.
The Nairobi Securities Exchange listed banks recorded a 19.0 per per cent growth in core EPS growth in H1'2018, compared to a decline of 14.4 per cent in H1'2017, and a 5-year average growth of 6.7 per cent..
Only NIC Group and Housing Finance Group recorded declines in core EPS, registering declines of 2.1 per cent and 95.7 per cent, respectively.
Deposits grew at 10.0 per cent year-on-year, a faster rate than loans, which grew by 3.8 per cent.
The loan growth came in lower as private sector credit growth remained low at an average of 2.5 per cent, in the 8 months to August 2018 below the five-year average of 13.0 per cent, with banks adopting a more prudent credit risk assessment framework to ensure quality loan books so as to manage the rising NPLs.