Kenyan Lenders Banking On a Good Year, Pegged On Growing Economy

By James Anyanzwa

Kenya’s listed banks posted modest earnings per share (EPS) last year but there are hopes of a better performance in 2016, fuelled by a rebound in economic activities and increased demand for credit from households and businesses.

“The outlook for the banking industry in 2016 is aligned to the expected performance of the Kenyan economy,” said Habil Olaka, chief executive, Kenya Bankers Association (KBA), the industry’s umbrella body.

“We anticipate the economy will maintain an upward growth momentum as reflected in the strong third quarter performance of 2015.”

However, a recent survey by the Central Bank of Kenya showed that a number of lenders are wary of the government’s cash constraints, instability in the forex market and high interest rates, averaging 18 per cent, arguing that these factors could trigger mass defaults in the banking sector and choke revenues.

“One of the key factors that will influence the performance of banks is whether macroeconomic stability can be sustained,” said Mr Olaka. “The Central Bank has signalled its intention to proactively pursue a policy to ensure a stable macroeconomic environment so as to support growth.”

In Uganda, the government revised downwards its growth estimates downwards from 5.8 per cent to 5.5 per cent for the 2016/2017 fiscal year, citing global economic weakness and volatility in the international financial markets, high inflation, uncertainty in the exchange rate and the possible adverse weather conditions linked to the El Nino phenomenon. This will impact on the banks’ profitability.

The Bank of Uganda last month held its policy rate at 17 per cent to boost the level of economic activity.

Rwanda’s economy is expected to have grown by seven per cent in 2015 but will slow down in 2016 to 6.3 per cent because of the weaker external environment, according to the National Bank of Rwanda (BNR).

Expansion agenda

KBA said that Kenyan banks are keen to continue with their regional expansion agenda which is dependent on a stable regional macroeconomic environment.

“There are positive sentiments around the region as manifested in the drive by the regional economies to implement infrastructure projects to support cross-border trade and investments. The admission of South Sudan into the East African Community is a step in the right direction,” said Mr Olaka.

Last year, those of Kenya’s big lenders that have released their financial results, save KCB and Diamond Trust Bank, returned flat earnings per share, with some recording declines.

“This change in EPS is an indicator of a rise in the cost of doing business in the financial sector. Banks are incurring much higher interest expenses,” said Daniel Kuyoh, a senior investment analyst at Alpha Africa asset managers.

Kenyan banks that recorded either marginal growth or reduced earnings per share included Equity Bank (Ksh4.65 – $0.04), NIC Bank, which has subsidiaries in Uganda and Tanzania (Ksh7 – $0.06), CfC Stanbic Bank (Ks2.41-$0.12), mortgage lender Housing Finance (Ksh3.43 – $0.03) and Barclays Bank Kenya (Ks.55-$0.01).

“Lower earnings mean that the price-earnings (P/E) ratio rises, leading to the stock being perceived as an expensive option compared with another with a lower PE. Investors are looking for PE ratios that are lower than other counters in the sector as it indicates the stock is undervalued to some degree,” said Mr Kuyoh.

According to analysts at Renaissance Capital, the impact of the sharp devaluation of the South Sudanese Pound is a key concern for banks operating in the oil-rich nation. They are KCB, Equity, CfC Stanbic and Co-operative Bank.

“With their sizeable operations in South Sudan, the Kenyan banks face the risk of their investment being significantly eroded,” said Renaissance Capital in a report released last month.


“A number of market participants have revised downwards their target prices of the banks they perceive will struggle to emerge out of this slowdown,” said Mr Kuyoh.

Analysts at BPI Capital Africa cut their earnings estimates for Equity, KCB and Co-operative Bank for 2016 by eight per cent largely due to the persisting high interest rate regime and concerns over the failure of two banks — Dubai and Imperial Bank.

“The income of banks particularly those which had exposure in South Sudan was hit hard. A low EPS also has an impact on dividends earned by shareholders,” said Eric Munywoki, head of research and business development at Sterling Capital.

And with non-performing loans becoming a headache for bank managers, analysts are warning that that the substantial exposure to the personal loans category which constitute about 25 per cent of the total loans in the industry, is a threat to the overall sustainability of lending in Kenya.

“Much of the growth in personal loans is driven by loans originated on mobile platforms, where the effectiveness of risk assessment is uncertain. We believe that this segment is potentially a ‘bubble,'” said analysts at BPI Capital.

Source: All Africa