Cytonn Investments has today released its Q1’2020 Banking Sector Report, which ranks I&M Holdings as the most attractive bank in Kenya, supported by a strong franchise value and intrinsic value score. The franchise score measures the broad and comprehensive business strength of a bank across 13 different metrics, while the intrinsic score measures the investment return potential.
The report, themed “Deteriorating Asset Quality amid the COVID-19 Operating Environment,” analyzed the Q1’2020 results of the listed banks. “We note that asset quality deteriorated in Q1’2020 with the gross NPL ratio increasing by 0.9% points to 11.3% from 10.4% in Q1’2019. This was high compared to the 5-year average of 8.5%. In accordance with IFRS 9, banks are expected to provide both for the incurred and expected credit losses. Consequently, this saw the NPL coverage increase to 57.4% in Q1’2020 from 54.5% in Q1’2019 as banks adopted a cautious stance on the back of the expected impact of the COVID-19 pandemic”, said David Gitau, Investment Analyst at Cytonn Investments. Four key drivers shaped the Banking sector in Q1’2020, namely Regulation, Consolidation, Asset Quality, and Capital Conservation.
“On the regulatory front, The Central Bank of Kenya on March 27th, 2020 provided commercial banks and mortgage finance companies with guidelines on loan reclassification, and provisioning of extended and restructured loans as per the Banking Circular No 3 of 2020. The Central Bank stipulated that banks would be allowed to extend loan repayments for their customers for a period not more than one year, the cost of restructuring and extension of loans would be met by the banks and the banks would have to report any restructuring in relation to the COVID-19 pandemic to the Central Bank monthly”, said MaryAnne Ng’ang’a, Analyst at Cytonn Investments.
I&M Holdings took the top position in the weighted score of both franchise and future growth opportunity perspective having a better capacity to generate profits from its core business, Diamond Trust Bank Kenya took the top position from a future growth opportunity perspective; however, it had a weak franchise score moving it to position 5 on the weighted score, and, HF came in 10th position on the back of weak franchise rankings scores as well as a non-promising future growth opportunity perspective as a result of lack of proper cost efficiency structure.