Cytonn assigns buy rating to banking stocks

Investment firm Cytonn sees Kenyan banking stocks as attractive for the long term investor as the quality of their assets improve under increasing regulation.

Banks have recently been hit with the Banking Amendment Bill capping interest rates, amendment of the Kenya Deposit Insurance Corporation Act to allow Treasury to have a say on receivership, draft guidelines on Internal Capital Adequacy Assessment Process and strict auditing to provide for bad loans.

With increased supervision following the closure of Imperial Bank, Dubai Bank and Chase Bank, Cytonn says banks have seen a jump in loss provisions with the most notable being the increase in non – listed banks.

Loan loss provisions by banks that are not listed shot up 392.9 per cent in the first half of 2016 and that of the 11 listed banks rose by 122.4 per cent noting the increment in the level of credit risk across the whole sector.

“The increased level of provisioning will improve the level of asset quality across the sector, creating a safer and attractive banking industry, providing more confidence to both the clients and investors,” the investment firm said Monday while releasing the banking sector report in Nairobi.

The firm said improved valuations of price to earnings, and improved growth of 15.8 per cent compared to 4.7 per cent recorded in the first half of last year has made the sector attractive for long term investors.

Not expected to significantly affect

Cytonn however noted that although the new law requiring banks to cap lending rates poses a risk to the sector, it is not expected to significantly affect the banks’ earnings for this year.

The banking counters were bled after President Uhuru Kenyatta signed the Amendment to the banking sector law.

Standard Investment bank noted that net foreign outflows at the Nairobi bourse last week were mainly in the banking sector with KCB, Co-op Bank, I&M Holdings and Barclays Bank jointly accounting for 97.8 per cent of total net outflows.

However, the sector received some reprieve following increased demand and speculative trading with Housing Finance shares climbing up 19 per cent last week.

Last year the foreign investors pulled out of the Kenya markets following a hike in Untied States interest rate but has been reversing during the first half of this year with foreign investors being net buyers throughout the year with inflows of Sh5.4 billion ($54.0 million).

“With banking stocks declining whilst holding a large percentage of the market cap, and foreign investor participation, we are likely to see decreased activity as uncertainty looms,” Cytonn said.