Last month we calculated the implied return of Kenya’s three largest bank stocks.
To do it, we simply multiplied each bank’s book-to-price (B/P) ratio by its return on equity (ROE) over the most recent twelve months. (Click here for a refresher on the method.)
The resulting return forecast shouldn’t be viewed in isolation, but it does give a good sense of which shares might offer the best combination of profitability and value.
The Most Bang for Your Bank Stock Buck
All Kenyan banks have now published their mid-year results. So, I thought it would be interesting to calculate implied returns for all eleven of them.
The results are in the table below, arranged from highest implied return to lowest.
|Company||Share Price (5.9.2018)||Book/Price Ratio||Return on Equity||Implied Return|
|1. NIC Group||Ksh29.00||1.71||12.9%||22.0%|
|2. I&M Holdings||Ksh102.00||1.07||16.4%||17.6%|
|3. KCB Group||Ksh44.50||0.73||21.8%||15.9%|
|4. Stanbic Holdings||Ksh101.00||1.06||14.8%||15.6%|
|5. Diamond Trust Bank Kenya||Ksh189.00||0.95||14.4%||13.7%|
|6. Equity Group||Ksh44.75||0.52||23.9%||12.4%|
|7. Co-operative Bank of Kenya||Ksh16.75||0.69||18.0%||12.4%|
|8. Barclays Bank of Kenya||Ksh11.15||0.67||17.5%||11.8%|
|9. Standard Chartered Bank of Kenya||Ksh205.00||0.63||18.0%||11.4%|
|10. National Bank of Kenya||Ksh5.45||3.48||0.8%||2.8%|
|11. HF Group||Ksh6.90||4.58||-0.2%||-1.1%|
What to Make of This
As you can see, NIC Group sports an implied return of 22.0% over the next twelve months. That’s head and shoulders above its peers.
Does this mean that you should run out and buy shares of NIC? Not necessarily.
The main reason that the stock ranks so highly is that it trades for a fraction of the bank’s net asset value. There might be a good reason for this. Perhaps the market expects NIC’s earnings to drop over the next year or two. Maybe its capital is inadequate or its asset quality is suspect.
These are the things you want to investigate before buying shares of the bank.
The table above is simply a tool that helps show you where to prioritize your research efforts.
Let’s Have Some Fun
But just for kicks, let’s see how well this ranking predicts actual returns over the next twelve months. I will track each bank’s return (including dividends) here.
Come September 2019, we’ll have a better idea of how much stock to put in this quick-and-dirty implied return metric.
Do you think the above ranking will turn out to be fairly accurate? Which three banks do you think will take the gold, silver, and bronze over the next twelve months. Let’s hear your take in the comments!