Cytonn Investments has said consolidation and revenue diversification will become important for Kenya’s banking sector going forward.
The independent investments management firm said the continued diversification of the sector has witnessed a consistent relatively strong profitability growth, which has alleviated the effects of relatively slow funded income growth.
Further, consolidation has resulted in the successful remediation of collapsed banks and left fewer but well-capitalized players to be able to catalyse economic growth.
Cytonn Investments made the comments when it released ‘Kenya Listed Banks H1’2019 Report’ with listed banks recording a 9.0% average increase in core Earnings per Share (EPS), compared to a growth of 19.0% in H1’2018. As a result, the Return on Average Equity decreased marginally to 19.3% compared to 19.5% recorded a similar period in 2018.
Deposit growth of 8.6%, slower than the 10.0% growth recorded in H1’2018. Interest expense increased at a slower pace of 5.3%, compared to 12.0% in H1’2018, indicating that banks have been able to mobilize relatively cheaper deposits. In addition, the removal of the 70.0% minimum deposit payable on deposits in the Finance Act 2018 reduced the cost of deposit funding.
Average loan growth at 9.8%, which was faster than the 3.8% recorded in H1’2018, indicating that there was an improvement in credit extension to the economy. Government Securities, on the other hand, recorded growth of 12.1%, which was a slower growth rate compared to 14.9% in H1’2018.
“This shows that banks have begun to adjust their business models, focusing more on private-sector lending as opposed to investing in government securities, whose yields declined during the year.”
Interest income increased by 3.7%, slower than the 7.9% recorded in H1’2018. Consequently, the Net Interest Income grew by 3.8%, slower than the 6.4% recorded in H1’2018,
The firm also observed that for banks, “Deteriorating asset quality remains a concern, which has seen banks reduce lending to the riskier private sector and instead continue channeling funds to government securities, in addition to raising their provisioning expenses.”
In the report, I&M Holdings presented the highest upside with an expected total return of 79.1% in terms of valuation.
Source I Cytonn Investments