Buy Barclays but hold NBK stock

BARCLAYS: A market report by Old Mutual has recommended this stock as an accumulate from a hold position with a rise target of Sh17.79 per share this year.

“This investment case is based on a recovering loan book and deposit growth that is driven by diversification into new areas of business, and strategic shift to small and medium enterprises,” says the report.

Over the past six years, Barclays has been losing market share in loans advanced in comparison to other large banks. “The bank is, however, witnessing a wind of change, from which we forecast a three-year growth in loan book to Sh171.07 billion, driven by a 10 per cent increase in customer deposits and a loan to deposit ratio of 78 per cent this year alone,” says the report.

Further, Old Mutual Securities notes that Barclays Bank is currently undervalued. “Our model suggests a fair value of Sh17.79 per share in comparison to the current low price of around Sh15 per share.”

The note adds that the stock has an upward potential of up to Sh19.23 apiece. “This should be driven by an over six per cent GDP potential, a stable currency and low inflation of below four per cent,” says Old Mutual.

In the same vein, the stock is seen as holding a base case price of Sh17.70 per share this year, fuelled by on-going diversification or revenue strategy and a shift to retail and SME.

NOTE TO INVESTORS

“The cost of management initiative adopted by the bank will result in higher profitability going forward.” Diversification into SME sector is expected to increase the bank’s loan book to Sh141.38 billion in 2015 from six per cent recorded by the bank in 2014. On the opposite extreme, the counter has bear case price of Sh16.41 per share for the year 2015 based on rising competition and possible changes in the regulatory environment.”

On Thursday, the share closed the day at Sh15.20 per share from a traded volume of 1.31 million shares, a 0.33 per cent drop. On Friday, the counter opened the day at Sh15.05 per share with an early intra-day trading high of Sh15.20 per share. The share has traded at a high of Sh18.45 and a low of Sh15 over the past one year. 

NBK: This counter is recommended as a hold. According to Old Mutual Securities, NBK is currently trading above its fair value of Sh19.84 per share at Sh21 per share.

For instance, on Thursday last week, the stock had closed at Sh21 from a low traded volume of 17,200 shares. On Friday, the counter opened at Sh21 per share.

Over the past one year, NBK has touched a high of Sh33 per share and a low of Sh19.75 per share. “Currently, the bank’s Capital Adequacy Ratios are under pressure and this constrains the bank from mobilising deposits and lending,” says Old Mutual.

For the bank to deliver higher growth rates, Old Mutual said, it will need to raise more capital. However, its Sh13 billion cash call has been iced by the markets regulator’s delays in granting NBK a rights issue approval.

The report cautions that while holding, investors should take note that the expected merge between NBK and Consolidated Bank could further harm its current loan book.

“The declining net interest margins remain a threat to the bank’s profitability growth,” notes the report. “Similarly, efforts by the government to strike a balance between economic growth and management of economic risks in the face of a falling exchange rate could possibly lead to contractionary monetary policies that lead to higher non-performing loans.”

In 2014, the bank’s bad loans stood at 10.6 per cent. This was much higher compared to the banking sector’s average of 5.1 per cent. NBK, which is the 12th largest bank in Kenya by asset size, will be majorly fuelled by regional expansion, organisational re-design, alternate banking channels, and the newly launched Chinese Businesses section, notes Old Mutual.