In report on Kenyan banking sector, Citi bank has issued a “buy” recommendation on the stock of KCB Group, Kenya’s largest bank by assets.
A target price of Sh 47 was set, 11.9% higher than the stock’s Monday closing price of Sh 42.
“Despite the Banking Act of 2016, Kenya’s leading banks maintain among the highest margins (8~9% NIMs) and returns (ROTE 20~23%) of any frontier market, coupled with strong capitalization, a stable currency and an improving political environment. We initiate on KCB and Equity Bank. We rate KCB a Buy with a TP of KSE47 as we find the current valuation undemanding.” The bank said in its weekly frontier markets note to investors.
On a year to date basis, KCB Group stock has been among the best performers at the exchange having returned about 53% in capital gains.
Equity – Neutral
Citi analysts however rate Equity Bank as Neutral with a target price of Sh38.5 against Monday’s closing price of Sh 42.75.
“We think the bank (Equity) is fairly valued after the strong post-election share price run.” Citi noted.
Equity Bank stock has gained 45% since the start of the year and +16% since the repeat of the Presidential elections in October 26 2017.
Rate Cap Law
“While there is little clarity on the future of the Banking Act, we acknowledge that many investors are interested in that “what if?” case if the legislation was to be amended, and hence provide a sensitivity analysis to gauge the upside from changes to the regulatory regime.” Citi said.
Since the rate cap law was effected in August last year, most of the banks have reported depressed earnings due to significant reduction in interest income. However, the Central Bank & the national treasury have previously hinted that the law could be reviewed by parliament citing the damage that has been caused to the economy.
The report by Citi shows that both Equity Bank and KCB have retraced much of their share price decline since the legislation was passed, and both stocks have been understandably volatile as of late on account of the political instability.
The recommendation’s issuance comes at a time when the two Banks have just released their third quarter earnings. For instance, KCB Group saw its profit after tax rise by 5% to Sh 15.1 billion while Equity Group Profit before tax slipped by 3.6% to Sh 20.7 billion.