Kenya: A Bonanza for Bank Investors

from Investing in Africa..

May 16, 2103, By Ryan Hoover

Jan Schalkwijk of Africa Capital Group traveled to Nairobi recently to meet with the management teams of several large Kenyan companies. The following is his take on three of the Nairobi Securities Exchange’s most prominent banks.

Barclays Bank of Kenya: Steady As She Goes

First on my itinerary was Barclays Kenya, which is one of the more conservative banks in Kenya. Their loan-to-deposit ratio is 80% and they chose not to compete for deposits in 2012 as they felt deposits had become too expensive. As a result, their deposits market share has contracted slightly.

Looking over a longer period, however, they have grown nicely, doubling their balance sheet to 118 billion Kenyan Shillings (USD 1.39 billion) in 6 years. Their non-performing loans are at 7% and trending down and their loan impairment stands at 1% and is stable. With new (tighter) banking regulations in the works, they are well positioned relative to more aggressive competitors.

Barclays’ greater Africa strategy is also being reconfigured to a more centralized structure as opposed to the current decentralized set-up whereby local countries report separately to London. This might allow Barclays to become a little less conservative and position itself more opportunistically in order to capitalize on the prospects for growth that abound across the continent.

Equity Bank: Competing With the Mattress

Next stop was Equity Bank. This bank is one of the market’s favorites and for good reason: it has a great business model. Whereas other banks compete with each other, Equity Bank believes its largest competitor is the mattress. As stuffing your money under the mattress has a lousy real rate of return and questionable safety of principal, Equity Bank enjoys a lower and more stable cost of funds than other banks that cater to a more affluent clientele.

Additionally, they have one of the lowest cost-income ratios at 49%, as they use agents rather than branches. They now have 50% of the banking customers in Kenya. I asked whether their international expansion is putting pressure on the cost-income ratio and the answer was a firm “no.” In fact, some of their new East African markets have even lower cost structures than Kenya.

Not much to not like here; the trick is to find a good entry point, valuation wise. One should not be too cheap, however, as often the entrenched market leaders in high growth economies will continue to do well as the pie expands.

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KCB: Appetite for Expansion

The last bank I met with was Kenya Commercial Bank, generally referred to as KCB. Though not as big as Equity Bank, KCB has a robust 14-18% market share in Kenya, depending on what metric you use. With 18% of shares held by the Kenya national social security fund, 51% by local institutional investors, and 7% by domestic retail investors, the bank has a fairly large local ownership constituency. At present, KCB has a significant liquidity ratio of 35.5%, though they are trying to bring that down modestly.

With its eyes on East Africa, the bank is focused on expanding in 5 other countries, including Uganda, Rwanda, Burundi, South Sudan, and Tanzania. In South Sudan their market share is 42%, in Rwanda it is 8% and their minimum target in any country is 5%. Only Tanzania is a bit disappointing at present, with the bank holding only a 4% market share.

Not unlike Equity Bank, KCB also sees its future tied to mobile banking and has been piloting the agency model in Rwanda, where it has 4,100 agents. Though not as efficient as Equity Bank, KCB’s cost-income ratio has been trending positively, declining from 67% to 60% to 57% in recent years, with a target of 50% in the near term.

Back to Basics Banking

What differentiates all these banks from the major banks in the US and Europe is their conservative loan-to-deposit ratios, which on average fall in the 70-85% range vs. 85-120% for their Western counterparts (with the European banks at the riskiest end of that range). Similarly, Kenyan banks enjoy higher net interest margins (10-13% vs. 3-5% in the US) and lower cost-income ratios (not too mention significantly higher growth prospects). Though investors face macro-economic risks in terms of inflation and exchange rates, on a company level the banks look decidedly healthier in Kenya than the too-big-to-fail banks in the developed world. But to the extent that inflation is kept in check and banks don’t have to compete too hard for deposits, the future for Kenyan banks looks very bright indeed.

Link to the article:  http://investinginafrica.net/2013/05/kenya-a-bonanza-for-bank-investors/?goback=%2Egde_58967_member_241572682

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