Global and local market analysts think the rally in bank and Safaricom Plc stocks should persist into 2020 riding on the repeal of a law imposing a ceiling of four percentage points above the benchmark rate.
Last year saw the Kenyan equities market record mixed performance, with NSE All-Share Index (NASI) and NSE 25 Share index gaining by 18.5% and 15.5%, respectively, while NSE 20-Share Index (NSE 20) declining by 6.3%.
Large-cap gainers during the year included Equity Group, KCB Group, Safaricom, NCBA, Barclays, Co-operative Bank and EABL which gained by 53.5%, 44.2%, 41.9%, 32.6%, 21.9%, 14.3%, and 13.6%, respectively.
The Nairobi Securities Exchange (NSE) has 62 firms with a market value of Ksh2.5 trillion ($55 billion).
The Finance Bill 2019, repealed section 33b of the Banking Act that provided for the capping of bank interest rates which had been blamed for stifling credit to the private sector.
“With the repeal of the rate cap law in November 2019, the financial performance of banks is expected to further improve and consequently spark investor confidence,” said Ascar Sudi, an Investment Analyst at Cytonn Investments. ”We remain neutral on equities for investors with a short-term investment horizon, but are positive for investors with a long-term investment horizon.” She concluded.
According to the Kenyan Bankers Association, most banks will not readjust their new pricing on commercial loans since banks have accepted their risk profile as an industry, with the cost of credit being at 13.0%, offered before the law was overhauled.
“Investors have been gradually bidding up stocks since the rate capping law was repealed in October 2019. The market may be poised for further gains this year as funds seek to beef up their underweight equity positions, subject to changes in fundamentals,” notes Faith Atiti and Stephanie Kimani, from the NCBA Research Team.
EFG Hermes Kenya Ltd. expects that listed lenders will remain key to investors in 2020.
“Following the recent reversal in rate caps, for our universe of banks, we estimate a higher earnings CAGR of 17.1%, with ROE set to improve from 17.9% to 21.6% between FY19-24e, driven by Net interest margin (NIM) expansion from an average of 6.7% in FY19e to 8.4% by FY23e; and an uptick in loan CAGR to 19.2%between FY19-24e,” EFG Hermes says in its 2020 yearbook.
“Despite the recent share price rally, the sector remains attractive from historical (average P/B of 1.7x between FY11-15) and fundamental perspectives (using our average ROE estimate of 21.6%, we estimate a justified P/B of 1.6x),” they add.
EFG Hermes Kenya Ltd. named Equity Group Holdings Plc and KCB Group Ltd. among banks and East African Breweries Ltd. as its top stock picks for the year.