I&M ranked most attractive listed bank in half-year report

I&M Group is the most attractive bank in Kenya, supported by a strong franchise value and intrinsic value score according to the latest half-yearly Banking Sector Report.

This is the sixth time in a row that I&M has topped due to its positive management and asset quality during the period.

The franchise score measures the comprehensive business strength of a bank across 13 different metrics, while the intrinsic score measures the investment return potential.

ABSA Bank, which recorded an 846.0 per cent Earning Per Share (EPS) growth, was the most improved. The lender finished second from fifth in Quarter 1 banking report 2021.

The report by Cytonn Investments, themed "Reduced Provisioning levels Spur Earnings Growth" analysed the Half-year One 2021 results of the listed banks.

“There was a significant improvement in the performance of the listed banking sector during the quarter, with the Core Earnings per Share recording a weighted increase of 136.0 per cent in Half-year One 2021, compared to a weighted decline of 33.6 per cent recorded in Half-year One 2020.

Increase in earnings

The significant increase in earnings was attributable to reduced provisioning levels by the listed banks following the relatively stable business operating environment during the period, with Loan Loss Provisions recording a weighted average decline of 24.8 per cent in H1'2021, compared to a weighted growth of 233.2 per cent in Financial Year 2020 and 5.5 per cent in Quarter 1 2021.

The performance in H1'2021 is, however, skewed by the strong performance from ABSA, KCB Group, and Equity Group, which recorded core EPS growths of 846.0 per cent, 101.9 per cent and 97.7 per cent respectively.

Non-Funded income grew by 19.2 per cent, compared to a decline of 1.1 per cent recorded in H1'2020, attributable to the expiry of the waiver on fees and commissions on loans and advances issued by the Central Bank of Kenya (CBK) in March 2020.

Interest income recorded a 15.0 per cent increase, compared to the 10.4 per cent increase recorded in H1'2020, while investments in government securities grew by 12.4 per cent, faster than the 11.7 per cent loan growth recorded during the period.

"Consequently, the Yield on Interest Earning Assets (YIEA) increased to 9.9 per cent, from the 9.7 per cent recorded in H1'2020, with Net Interest Margin (NIM) increasing to 7.4 per cent, 0.4 per cent points higher than the 7.0 per cent recorded in H1'2020 for the whole listed banking sector,” said Ms Ann Wacera, Investment Analyst at Cytonn Investments.

Regional expansion

Four key drivers that shaped the banking sector in H1'2021 are regulation, regional expansion through mergers and acquisitions, asset quality deterioration, and capital raising.

On the regulatory front, the loan restructuring window as per the Banking Circular No 3 of 2020 by the CBK provided to commercial banks and mortgage finance companies on loan restructuring which came to an end on March 2, 2021, having seen loans worth Sh1.7 trillion restructured, representing 57.0 per cent of the banking sector's loan book.

Mergers and acquisitions remained a key theme in H1'2021, with the current environment providing opportunities for bigger banks with an adequate capital base to expand and take advantage of the low valuations in the market to further consolidate and buy out smaller banks.

“We also saw listed banks borrow from international institutions to not only strengthen their capital position but also boost their ability to lend to the perceived riskier Micro Small and Medium-Sized Enterprises (MSMEs) segment to support the small businesses in the tough operating environment occasioned by the Covid-19 pandemic,” said Mr Robert Karuiyi an analyst at Cytonn Investments.

I&M Group pole position indicated a superior future growth opportunity and investment return potential, while ABSA Bank took the top position in the Franchise Value Rankings for displaying a broad business strength and having a better capacity to generate profits from its core business.

 Non-performing loan

ABSA Bank also recorded an improvement in the overall ranking, coming in second, mainly on the back of the bank having the lowest non-performing loan ratio of the listed banks at 7.9 per cent, coupled with an improvement in the bank's cost to income ratio, which recorded a 5.8 per cent points decline to 55.5 per cent from 61.3 per cent recorded in Q1'2021.

Standard Chartered Bank's rank improved to position six from position nine in Q1'2021, attributable to a 0.2 per cent decline in its cost to income ratio, which contributed to an increase in the bank's franchise value score, coupled with the bank's non-performing loan coverage of 80.1 per cent, which was the highest in the listed banking sector.

Stanbic Bank's rank dropped to position seven from fourth position in Q1'2021, attributable to a 1.7 per cent points reduction in the bank's net interest margin to 4.4 per cent from 6.1 per cent in Q1'2021, coupled with a 12.7 per cent points decline in the bank's non-performing loan coverage to 51.2 percent, from 63.9 per cent in Q1'2020.

Housing Finance came in 10^th on the back of weak franchise rankings scores as well as a non-promising future growth opportunity perspective due to lack of a proper cost efficiency structure.

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