Bank stocks made Nairobi Stock Exchange investors much richer in 2013.
A stable political environment, regional growth, good profits, and a relatively steady interest rate environment kept the bulls running.
All bank shares ended up in positive territory, most outpaced the NSE’s All Share Index, and a couple even doubled in market value. What’s more, they paid out some of the most generous dividends on the exchange.
Here’s a closer look at how each bank stock performed during the year.
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But all of that’s in the rear view mirror. What we really want to know is whether these stocks are worth banking on this year. Will their shares pop or drop? Sizzle or fizzle? Jump or slump? Rise or… Well, you get the idea.
To help answer that question, I asked for some help from three local experts — one bold bull, one cautious bull, and one bear.
Here are each of their arguments in turn:
The Bull Case
Alistair Gould, Head of Trading at Old Mutual Securities (Kenya)
I’d say that the majority of bank shares aren’t overvalued as we are anticipating strong performance for the 2013 fiscal year, which, coupled with decent dividend payouts, will continue to keep our banks attractive and push the stocks to higher levels.
Moreover, the performance of the banking sector going forward will be driven by increased economic activity from the mining, oil & gas, and construction sectors. We also foresee more uptake of private sector credit in the new year which still leaves room for banks to grow further in 2014.
However, with competition increasing within the Kenyan banking sector, we believe that the performance of each individual bank will be driven by innovation, product development and well-planned geographical expansion. There are still some good picks that investors should try to get in on early in the year. In particular, we like Coop Bank, National Bank, and Equity Bank.
The Wary Bull Case
Isaac Njuguna, Head of Investment at Zimele Asset Management
Listed banks are currently trading at a trailing p/e ratio of 10 times against the average market trailing p/e ratio of 15 times. This suggests they’re undervalued in spite of their recent gains, especially if they report sustained performance in profits in 2013.
However, despite favorable economic growth projections in 2014, one of the sector’s main challenges is the threat of regulation of interest rate spreads. Various government task forces are investigating why spreads in Kenya are high in relation to banks elsewhere. Regulation of spreads could limit banks’ earnings growth to single digits, and if it were to become reality, one could say banks are over-priced.
If controls on interest spreads don’t materialize, I’m bullish on KCB, Equity, and Co-op Bank.
The Bear Case
Vimal Parmar, CFA, Head of Research at Burbidge Capital
With the banking sector trading at a weighted average price/book ratio of about 2.8, roughly 30% of bank stocks are quite overvalued, especially the leading retail banks. Just two of the listed banking stocks trade less than their intrinsic value — CFC Stanbic and National Bank (assuming its recent restructuring yields results).
Going forward, growth in the sector may not be high enough to justify the higher valuations owing to increasing competition not only within the sector but also from the telecoms sector, which has rolled out innovative mobile banking services like M-Shwari.
However, from a technical perspective, investor demand may keep the stock prices in range (if not increase) because they don’t see better alternatives elsewhere.
When trying to unearth value in banks, I like stocks with low price/book ratios and high returns on equity (ROE).
As you can see in the chart below, such bank stocks are scarce as hen’s teeth in today’s market.
While the sweet spot in the upper left hand corner of the chart is empty, there’s a bunch of outliers in the upper right hand corner. These are very profitable banks, but their price is steep. Look for them to underperform the sector as a whole in 2014. Co-operative Bank, NIC, and Housing Finance look like better values.
In sum, I expect most Kenyan banks to finish 2014 higher than where they started, but I don’t expect the sizzling performances of 2013.
What do you expect from the Nairobi Stock Exchange’s bank stocks this year? Do you fall in with bull, wary bull, or bear case? Or another case entirely? Let’s hear it in the comments!