Category Archives: bank shares

Genghis Stock Picks for 2019

Nairobi-based investment bank Genghis Capital launched their 2019 “investor playbook” with the theme of embracing value. 2018 was a challenging year for the Kenyan economy and capital markets and that is expected to continue in 2019, but this also presents opportunities for investors.

Kenya has a relatively small number of stocks (65) on the Nairobi Stock Exchange (NSE) – and Genghis chose nine stocks as their 2019 financial (banking & insurance) and non-financial picks for investors, in three categories:

  • Momentum stocks: Equity Bank, East African Breweries, KCB Group, Safaricom.
  • Income stocks: Stanbic, Barclays Kenya, Standard Chartered, KCB. 
  • Value stocks: Kenya Reinsurance, KCB, Bamburi Cement. 

They cited that Safaricom scored positively in every category while KCB and Equity banks had embraced digitization, high asset quality and low cost structures.

Other points from the playbook launch presentation:

  • They do not expect a repeal of interest rate caps this year, even though its impact has been negative on the economy.
  • Funds raised for infrastructure bonds are not all being used for that; some are going to retire other debts and they should be properly used
  • Public-private partnerships are not coming to fruition; paperwork for the Nairobi-Nakuru highway was submitted in April 2018 but there has been no decision.
  • To a question – “what is the regulator doing to increase the confidence of investors amid fraud incidents?” – the CMA can only do so much and the onus is still on the company directors. International markets have graver penalties than Kenya and perhaps it is time the Director of Public Prosecutions started looking at some cases here and following through on enforcement. 
  • While Kenya Re is a pick in the playbook, they generally don’t cover the insurance sector – it has challenges including fraud, price under-cutting, and low penetration levels (3%) and a lot has to happen to unlock value and growth in the insurance mass market. Kenya Re is there because it is under-valued (owing to lack of clear strategy and proper management) but would be desirable to other insurance investors if the government decided to sell its shareholding.
  • They expect one main listing and others on the smaller NSE boards this year. But while a number of planned privatizations have been mentioned  – Consolidated and Development banks, Kenya Pipeline, Kenya Ports they face numerous hurdles while others like sugar companies in Western Kenya have been on the pipeline since 2011. 

Interest Cap Impact and Bank Resilience

The end of August marks the deadline for Kenyan banks to publish their unaudited half-year results (January to June 2017). Those of most banks are done and there are some trends, some concerns and some resilience areas seen in what’s been a challenging year for the sector that has for a long time been seen as one that earns super-profits for its shareholders.
The interest rate capping bill was signed last August, and while its initial impact was not fully seen in the 2016 results, one year later these can now be interpreted. The law has had far-reaching impacts on different banks, their performance, operations and strategic directions. Overall, there has been a decline in bank results due to a mix of interest rate caps and digitization, as phones have taken over from branches as the main point for the bulk of customer transactions.
Some observations: 
  • Less traditional banking: there has been a decline in assets as more banks have turned to digitization to cut costs, and increase efficiency. At Equity, deposits were flat between March and June, which also marked the third straight quarter of overall loan declines
  • Lower interest income: e.g. 45% down at Family Bank, plunging it to a half-year loss
  • A buildup of government debt: Equity now has Kshs 105 billion, KCB 100 billion, and Diamond Trust 83 billion.
  • More closure of branches e.g. Barclays, Standard Chartered, Bank of Africa and Ecobank. But it’s not all gloom as some banks like Cooperative and Diamond Trust have announced plans to open new branches.
  • Job cuts have been announced at KCB, Standard Chartered, Barclays, Family Bank, National Bank of Kenya, NIC Bank, Ecobank, Bank of Africa, First Community Bank and Sidian Bank.
  • With nowhere to go, banks are giving money back to shareholders. Some banks have reduced capital, while KCB with profit flat at the half-year will pay a rare interim dividend confirming analysts’ view that some banks will return more capital to shareholders at a time when they have curtailed lending to riskier customers. 
  • Big banks are okay, small ones, not so much:

  • Losses, not profits. E.g. Family and Sidian, went into the red at the half year, despite layoffs and closures, while Ecobank managed to stay above water. These have mainly been attributed to reduced interest income.
  • Declines in loans and deposits at tier ii banks, and T1 equity
  • Mortgage declines: Buy Rent Kenya said that there has been a major drop in the number of mortgage applications over the past year and that those that the cap was meant for are currently the biggest losers as banks are skeptical to give credit to most individuals as they now have numerous terms and conditions that are not easy to meet.
  • Local banks converting debt to equity at Kenya Airways: This has been a reluctant move, with three banks delaying the Ksh 23 billion conversion that will see a consortium of Kenyan banks become the second largest shareholder at the airline.
  • Equity announced they will no longer lend unsecured loans to salaried Kenyans, cutting off a product feature that has brought them great popularity.
  • New business lines:  Banks have looked to other sources of income this year. Co-operative Bank which has net interest income and pre-tax profit that was down 10% in the half-year, received regulatory approval from the Central Bank of Kenya to enter into a joint venture with Super Group, a leading South African leasing company and together they will target major infrastructure projects, government vehicle leasing, oil & gas exploration, and other leasing opportunities. Elsewhere, National Bank entered a partnership with World Remit to allow remittances to be paid directly into bank accounts at NBK, Barclays is funding solar mini-grids in Turkana while Standard Chartered bucked the trend on Equity and will step up unsecured lending. 
  • Non performing loans (NPA’s) are up: At NBK, they are up to 29 billion, half the 57 billion loan book. NBK is awaiting a Kshs 2.9 billion NSSF (shareholder) loan to shore up capital.
  • NPA’s have also gone along with increased provisions e.g. 1.8 billion at Stanbic at the half-year.

Diamond Trust: Fourth Rights

Diamond Trust Bank is back for a fourth rights issues in recent years from its 11,136 shareholders at a rate of (Kshs 165) $1.95 per share, with each of shareholder entitled to buy 1 share for every 10 held. This follows others done in 2006, 2007 2012  and now this one.
Contrasting the four issues 
Year – Nov-06 ; Nov-07 ;  Jul-12 : Jul-14
Target (Kshs M) – 735 ; 1,600 ; 1,809 : 3,631
New shares (M) – 15.5 ; 23.3 ; 24.4 : 22.0
Price (Kshs)  – 50 ; 70 ; 74 ; 165
Ratio    1:8 ; 1;6 ; 1;8 : 1:10
Budget (Kshs M) 41.6 ;  54.7 ; 57.6: 100.1
  • The IFC remains as a principal funder and shareholder for the bank.
  • Diversification has paid off with the bank having 30% of assets and 19% of profits from outside Kenya. While 77% of Diamond Trust’s $61 million after-tax profit is from Kenya, the Tanzania and Uganda operations contributed about $7 million each of profit with Burundi trailing at ~$150,000 
  • They have extended traditional banking services in the mobile and card age by having M-Pesa at all their ATM machines. They also issues prepaid cards  for NationHela, NakumattGlobal and MiCard and handle remittances/money transfer for WesternUnion, MoneyGram and XpressMoney
  • Others institutions that may need to have rights issues or raise capital this year include ABC, Commercial Bank of Africa, Consolidated and Equatorial banks. 

Diamond Trust: Third Rights

Diamond Trust Bank is back to shareholders for some fund raising after two rights issues in 2006 and 2007. 
Since venturing into  Uganda and Burundi in  2008, it has become a pan-African bank growing from assets Kshs 45 billion and Kshs 1.6 billion in profits to 2011 assets of  Kshs. 107 billion and profits of Kshs 4.3 billion. The additional  funding will be invested in Tanzanian Uganda and Burundi as well as alternative channel categories.

Like the previous issues, this one closing on Friday August 10, is likely to exceed full subscription. All the large investors – Aga Khan Group (AK fund for economic development fund  (owns 17%), Habib Bank (11%), Jubilee Insurance (10%), and the International Finance Corporation (IFC owns 10%) have committed to take up their rights.
The above commitments are for 51%, and with the minimum target is 60%, there’s a rump option in in case other shares are not taken up but it’s expected that most of the 11, 242 shareholders will pay up (there was little trade in rights when it opened).

Contrasting Rights
Year – Nov-06 ; Nov-07 ;  Jul-12
Target (Kshs M) – 735 ; 1,600 ; 1,809
New shares (M) – 15.5 ; 23.3 ; 24.4
Price (Kshs)  – 50 ; 70 ; 74
Ratio  –  1:8 ; 1;6 ; 1;8
Budget (Kshs M) 41.6 ;  54.7 ; 57.6
 

Others
– IFC has also provided funding of about $65 million for the banks operations.
– All the arms of the company are profitable; Kenya profit after tax of Kshs 2.2 billion in 2011, Tanzania (own 55%) Kshs. 398 million, Uganda (own 54%) Kshs. 315 million and Burundi  (own 67%) Kshs. 31 million
 – Diamond Trust only owns 3 of their branches in Kenya (out of 38) , and none of the 22 in Uganda, 14 in Tanzania or 4 in Burundi.
– There’s no indication of interest to venture into Rwanda or South Sudan as with many other Kenyan banks.

Bank Tales II

Maina T kind of started this thread with a review of the P/E correction of Nairobi Stock Exchange (NSE) shares.

NSE: ½ full or ½ empty? – to take it further, how are NSE shares today compared to last October? If you considered them fairly priced then, you are frowning today, but if you considered them over-valued, are you smiling today?
estimates
– Shares that have appreciated since October 2007: 4% – BAT Scangroup, 3% – Access 3%, 1% – Unga
– Shares that have depreciated since October 2007: (83%) – Mumias (74%) NIC (59%) Nation Media Group, CFC (55%) – Housing Finance, (53%) – Sasini (51%) – Kenya Airways (47%) – Sameer (45%) – Kengen, Centum (44%) – Eveready (43%) – Williamson (42%) – Express, Jubilee (41%) – KPLC, Kenol
– Banking sector: Best (4%) – NBK, worst (-74%) – NIC, sector average is -32%

Interesting that despite the world financial meltdown of late 2008, the Kenyan financial sector is faring no worse than other sectors (agricultural, industrial) which are all down approximately 1/3,and remains the sector most likely to produce super-profits again this year. Best performing sector is commercial services (excluding Safaricom only listed in June 2008) which is down 20% from a year ago

Cheap M&A The depressed NSE prices bring out good and bad banking opportunities.
– Good for anyone speculating on buying into a Kenyan bank. The Helios stake in Equity is priced as almost what it was when the deal was signed, while the CFC/Stanbic merger is worth ½ as much as it was a year ago.
– Bad for the Government who are hoping to raise funds from further sale of NBK and Development Bank of Kenya share. It also raises a question of how Co-op Bank IPO shares will be received i.e. if you enter a train going down hill and you want to go up hill, where will you end up?

Family Bank a recent stockskenya discussion could indicate that a listing of shares could happen soon.

EADB: sad tales on the East African Development Bank.