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Kenyan bank stocks seen attractive for long-term investors

An investor monitors trading at the Nairobi Securities Exchange
8. September 2016

Investment firm Cytonn sees Kenyan bank stocks as attractive for long-term investors if the quality of assets improves under new regulations

Banks have recently been slapped with the rate-capping Banking Amendment Bill, changes to the Kenya Deposit Insurance Corporation Act allowing the Treasury to have a say on receivership, draft guidelines on Internal Capital Adequacy Assessment Process and strict auditing to provide for bad loans.

With increased supervision following the closure of Imperial Bank, Dubai Bank and Chase Bank, Cytonn says banks have seen a jump in loss provisions with the most notable being that for non-listed banks.Loan-loss provisions by non-traded banks shot up 392.9 per cent in the first half of 2016 and that of the 11 listed banks by 122.4 per cent.

“The increased level of provisioning will improve the level of asset quality across the sector, creating a safer and attractive banking industry, providing more confidence to both clients and investors,” the investment firm said on Monday while releasing the banking sector report in Nairobi.

It said improved valuations of price to earnings and improved growth of 15.8 per cent compared to 4.7 per cent recorded in the first half of last year have made the sector attractive for long-term investors. 

READ: Tough times for banks as Uhuru caps cost of loans

Cytonn, however, noted although the new law requiring banks to cap lending rates poses a risk to the sector, it is not expected to significantly affect earnings.

The banking counters at the Nairobi Stock Exchange bled after President Uhuru Kenyatta signed the amendment to the banking sector law.

Standard Investment Bank noted that net foreign outflows at the Nairobi bourse last week were mainly in the banking sector with KCB , Co-op Bank , I&M Holdings and Barclays Bank jointly accounting for 97.8 per cent of total net outflows.

However, the sector received some reprieve following increased demand and speculative trading with Housing Finance shares climbing up 19 per cent last week.

“With banking stocks declining whilst holding a large percentage of the market cap, and foreign investor participation, we are likely to see decreased activity as uncertainty looms,” Cytonn said.

Cytonn rated Equity Bank as the top stock pick with a strong franchise value ahead of Kenya Commercial Bank.