Cytonn Investments has ranked I&M Holdings as the most attractive bank in Kenya, supported by a strong franchise value and intrinsic value score, according to its Q1’2020 Banking Sector Report.
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 report, themed “Deteriorating Asset Quality amid the COVID-19 Operating Environment,” analyzed the Q1’2020 results of the listed banks.
“We note that asset quality deteriorated in Q1’2020 with the gross NPL ratio increasing by 0.9% points to 11.3% from 10.4% in Q1’2019. This was high compared to the 5-year average of 8.5%. In accordance with IFRS 9, banks are expected to provide both for the incurred and expected credit losses. Consequently, this saw the NPL coverage increase to 57.4% in Q1’2020 from 54.5% in Q1’2019 as banks adopted a cautious stance on the back of the expected impact of the COVID-19 pandemic”, said David Gitau, Investment Analyst at Cytonn Investments.
Four key drivers shaped the Banking sector in Q1’2020, namely Regulation, Consolidation, Asset Quality, and Capital Conservation.
I&M Holdings took the top position in the weighted score of both franchise and future growth opportunity perspective having a better capacity to generate profits from its core business, Diamond Trust Bank Kenya took the top position from a future growth opportunity perspective; however, it had a weak franchise score moving it to position 5 on the weighted score, and, HF came in 10th position on the back of weak franchise rankings scores as well as a non-promising future growth opportunity perspective as a result of lack of proper cost-efficiency structure.
The table below ranks banks based on franchise and intrinsic ranking which compares metrics for efficiency, asset quality, diversification, growth, and profitability, among other metrics.
Ten listed Kenyan banks recorded a 7.4% average decline in core Earnings per Share (EPS) compared to a growth of 12.2% in Q1’2019.
The depressed earnings recorded in the listed banking sector is partly attributed to the tough operating environment occasioned by the ongoing Coronavirus pandemic, which saw total operating expenses increase by 25.6%, outpacing the 10.3% increase recorded on total operating income.
The Banks recorded a deposit growth of 14.3%, faster than the 11.0% growth recorded in Q1’2019. Interest expenses on the other hand rose by 11.4%, faster than 2.5%, recorded in Q1’2019. The cost of funds, however, declined coming in at a weighted average of 3.1% in Q1’2020 down from 3.5% in Q1’2019 owing to the faster 12.2% growth average interest-bearing liabilities indicating that the listed banks were able to mobilize cheaper deposits.