RETURN ON INVESTMENT

Banking investors to reap dividends on rate cap removal– report

Kenya's banking sector tipped to continue offering lucrative returns to investors after the removal of interest cap law last November.

In Summary

•The South African investment firm rated the three stocks, with Co-op Bank retaining a buy rating, KCB upgraded from hold to buy hold while Equity has been rated a hold.

•Co-operative Bank’s share price had the highest upside potential at 14.2 per cent to a projected fair price of Sh17.30 from the current Sh15.

Cooperative Bank Group CEO Gideon Muriuki with President Uhuru Kenyatta at the bank’s stand during a past Diaspora Investment Conference at the Windsor Hotel and Country Club. Photo/JAMES KAMAU
Cooperative Bank Group CEO Gideon Muriuki with President Uhuru Kenyatta at the bank’s stand during a past Diaspora Investment Conference at the Windsor Hotel and Country Club. Photo/JAMES KAMAU

Kenya's banking sector has been tipped to continue offering lucrative returns to investors after the removal of interest cap law in November, latest valuation report shows.

The sector analysis by Investec Bank of South Africa released Friday shows the low funding costs relative to the sector allows the banks to compete more aggressively for sparse high-quality borrowers compared to lenders in other Africa’s biggest economies.

“Kenyan banks continue to offer more competitive returns relative to their counterparts in other African countries as a result of Kenya’s superior banking policy consistency and stability especially the recent repeal of rate caps,” said the report.

According to the report, most banking stocks are in the buy position with shares projected to grow as high as 14 per cent.

Co-operative Bank’s share price had the highest upside potential at 14.2 per cent  to a projected fair price of Sh17.30 from the current Sh15.15.

 KCB comes second with a 12.9 per cent  upside potential from Sh52 to Sh58.70 while  Equity Bank came third with its share projected to rise 3.9 per cent from Sh50.25 to Sh52.20.

With this projection, the investment firm says Co-op Bank is on track to deliver a 12-month local currency return of 22.3 per cent and a dollar return of 16 per cent, followed by KCB with a 22.2 per cent local currency return and a dollar return of 15.9 per cent in one year.

Local investors at Equity Bank are likely to get a 10.1 per cent return on investment in next 12 months while foreign currency investors will reap a 5.4 per cent gain.

The South African investment firm rated the three stocks, with Co-op Bank retaining a buy rating, KCB upgraded from hold to buy hold while Equity has been rated a hold.

According to the valuator, Co-op Bank has delivered much stronger growth in non-funded income streams relative to peer banks, on account of robust digital banking offerings and agent banking channels, a trend expected to continue in the medium term.

 “We forecast rising return on Equity Bank as existing clients are migrated to cheaper digital and agent channels which should contain cost,” Investec Report said.