When I asked my friend Kamanda Morara of Ashanti Research for his best Kenyan stock pick for 2013 in mid-December, I had no idea that his choice would bear fruit so quickly.
His tip, KCB Bank Group (KNCB:KN), was trading at a price of KES27.50 at that time. This gave it a dividend yield of 6.7% and a trailing P/E ratio of just 6.5.
Someone must have been eavesdropping on our conversation.
The stock now boasts a price of KES33.50 — a gain of nearly 22% in less than two months.
So, I checked back in with Kamanda last week to congratulate him and to ask whether he felt KCB still had room to run.
The answer was yes. KCB remains his top Kenyan pick for large investors in spite of its big recent gains. He explains why below.
I was regrettably slow to clue readers in to your top Kenyan stock for 2013. Do you think KCB still offers investors compelling value?
Kamanda Morara: KCB has rallied considerably, but it is still a great pick because of its liquidity (which is a key consideration for international investors) and visibility, which helps in price discovery. Plus, I am confident that the March presidential election will be carried out peacefully, which should drive the entire market higher.
The Nairobi Securities Exchange is home to lots of relatively large bank stocks. What differentiates KCB from the rest?
KM: KCB is the only Kenyan bank that has operations in all countries of the East African Community: Kenya, Tanzania, Uganda, Rwanda, Burundi, and even South Sudan. Moreover, it has a long and rich history in Kenya which dates to 1896. Because of this, it is deeply entrenched in the Kenyan psyche. Kenya identify personally with it.Kamandar Morara, Executive Director of Ashanti Research
Do you expect the bank to be a rapid grower over the next five years? And, if so, where will the growth come from?
KM: There are three reasons that I expect it to be a fast grower.
First, KCB is still relatively inefficient compared with its peers. Namely, Equity Bank (EQBNK:KN), Barclays Bank of Kenya (BCBL:KN), and Standard Chartered Bank Kenya (SCBL:KN). KCB’s cost to income ratio has been on a downward trend. A further fall in this ratio — even if revenues remain stagnant — will translate into huge profit growth.
The next big growth driver is its regional reach. Kenya’s economy is projected to grow at a rate of at least 5% per year over the next five years. Remarkably, the rest of East Africa is expected to grow even faster. KCB is well placed to finance cross border trade flows that will only increase as regional integration in East Africa gathers steam.
Finally, KCB has not yet fully exploited its potential for cross-selling various banking products. In 2012, the bank began an aggressive foray into asset finance, which had been a sector long dominated by NIC Bank (NICB:KN). And KCB recently overtook Housing Finance (HFCL:KN) as Kenya’s leading mortgage provider. This momentum of growing market share in additional product segments will only grow as KCB continues to leverage on its wide branch network and strong balance sheet.
Does KCB’s mobile money platform, Mobi Bank, hold promise for generating additional profit for the bank?
KM: Mobi Bank is, in my opinion, a “me too strategy.” Most banks in Kenya have embraced mobile banking, and it would be risky for any player to be left out. Mobile banking will deepen penetration of banking in Kenya and grow the sector as a whole.
The company will soon have a new (rather young) CEO, Joshua Oigara. Should this be a concern to prospective investors?
KM: Oigara is young, but he’s supported by a strong executive team that has been running the bank for many years, and it’s worth noting that he was handpicked by the former CEO who presided over a great growth trajectory for the bank.
He also has a strong background in financial management which will be key to cutting costs and enhancing the efficiency of the bank. In terms of the bank’s strategy, he has assured investors that he shall maintain the current strategic plan that has been working for the bank.
It’s good to remember, too, that Co-operative Bank (COOP:KN) appointed a relatively young CEO in the 1990s (Gideon Muriuki) who helped transition it from a relatively small player recovering from the 1998 bomb blast on the American embassy which damaged its headquarters into a one of the top 5 Kenyan Banks by assets and profitability. I believe KCB has chosen a young, energetic CEO to grow the bank over the long term.
You mentioned that you believe the Kenyan elections will be peaceful. Why are you optimistic about this?
KM: Kenyans have learnt their lessons from the last elections that were held in 2007, and many see no need to fight for a wealthy political class that share more in common than the rest of the country.
An independent electoral commission has been established, and there is now a much more independent judiciary which enjoys the goodwill of most Kenyans. The elections are bound to be carried out in a fairer manner this time, and the losers will have greater confidence in addressing their grievances through the legal system. The new constitution which has reduced the powers of the president and devolved government to 47 counties has reduced the need for fierce jostling for the presidency.
Lastly, on a lighter note, which bank do you personally bank at and why?
KM: I bank with NIC Bank. They have excellent customer service. It’s a niche bank focusing on the middle and upper middle class in Kenya. It is also a great buy from an investment perspective with its low P/E ratio and rapid growth. The reason I have rated KCB higher as a buy is mainly because of the liquidity and market capitalization aspects that are a key consideration for international high net-worth and institutional investors eyeing the Kenyan stock market.
What Do You Think?
Do you think KCB will be one of Kenya’s best stocks over the next 12 months? Will the elections be carried out peacefully? Let us know your thoughts in the comments!
Kamanda Morara is a Chartered Accountant and the Executive Director of Ashanti Research Ltd, a Nairobi-based buy-side investment research firm. At the time of publication, he held shares of NIC Bank in his personal portfolio.