Why bank stocks are best picks in 2016

Stocks of Kenyan banks are heavily discounted, and most are trading below half of their fair price, a London-based investment bank, Exotix Partners, has said in an update.

Heavy sell-offs last year prompted by domestic and global concerns ensured bank stocks closed 2015 at their lowest valuations in years.

The analysts have recommended KCB as the top pick, estimating the stock should be priced at Sh72.7, against the Sh41 price it was trading at when the analysis was compiled. This translates to an 82 per cent discount. The counter closed Monday at Sh38.50.

Co-operative Bank’s shares at the Nairobi Securities Exchange (NSE) are another good target, according to Exotix, who say the stock should be priced at Sh26.7 against its Sh17. The counter closed Monday at Sh16.60.

“The good news is that Kenyan banks are now trading multi-year low valuations,” said the investment bank in a note, which excluded projections on Equity Bank with which it has a running partnership.

Earning projections

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Other bank stocks thought to be trading at deep discounts are Diamond Trust Bank and NIC at 59 per cent and 71 per cent, respectively.

A downturn across the NSE is largely responsible for the low stock valuations on nearly all counters, not just the banking sector.

A spike in interest rates caused a jump in finance costs for many listed firms and a sharp dip in valuations of bonds, which resulted in a record number of profit warnings.

But the fundamentals for commercial banks remained strong, with the bigger lenders expected to record double-digit growth in profits — except for Standard Chartered Bank, which issued a profit warning late last year.

For StanChart, which was once Kenya’s most profitable lender, the anticipated drop in profitability is specific to the absence of a one-off multi-billion-shilling gain reported in 2014.

Its stock slumped nearly 42 per cent on the impact of market-wide factors and its own earning projections.

Banks’ dipping valuations were clear throughout 2015, with Housing Finance, a mortgage provider, shedding more than half its worth at the close of the year, while National Bank, a mid-tier lender, lost 36 per cent of its value.

CFC Stanbic, the local subsidiary of Standard Bank of South Africa, shed more than a third of its value, while Co-op Bank, which was projected to grow its profits fastest in the industry, had lost a 10th of its share price by December 31.

In its nine-month reported results, Co-op announced its net profits had risen by more than a third, helped by wide cost savings and a spike in non-interest income, including earnings from trading in foreign exchange.

On average, banking stocks had lost 22 per cent of their value by the close of the year.

Exotix, however, analysed only six of the 11 listed banks in its update, and only gave recommendations on five after ignoring Equity Bank on concerns of conflicting interests.

KCB and Co-op were reported to have diversified their service delivery platforms away from the traditional branch network, enabling them lower their costs per transaction.

“Indeed, both Co-op and KCB have invested significantly in building their agency network, and all the other banks in our universe have partnered with telcos (primarily Safaricom) to provide some form of mobile banking,” Exotix said in its update.

Nairobi’s Standard Investment Bank also acknowledges that banking stocks are currently trading at deep discounts, through they put these at more modest levels. For instance, in the investment bank’s recently compiled sector update, KCB’s fair price is put at Sh59 a share.