Risk-Based Model to Boost Interest Income: In FY’23 and going forward, we expect interest income to rise as banks increase lending to the private sector using a risk-appropriate metric for determining the lending rates. We foresee upside potential for Net interest margins (NIMs) driven by higher lending and government securities yields. The prevailing high-interest environment has created expensive deposit mobilization costs as banks compete with other financial institutions.
Sector Valuation is at a Discount to Frontier Peers: Compared to frontier peers (with the MSCI Emerging markets banks index at a P/B of 0.95x) the local banking counters ( with a median trailing P/B of 0.65x) are trading at a discount. However, individual counters such as Stan Chart is trading above the MSCI EM Banks Index while counters such as DTB are almost at a 74% discount. The above P/B trend shows that Kenyan banks are fairly priced compared to their EM peers and provide an attractive investment opportunity.
Our Top Picks: Our top picks are EQTY (+51.24% upside), KCB (+24.52% upside), and IMH (+25.34% upside), largely on account of huge upside potential following recent share price dip despite strong fundamentals. On a comparative basis, we also find these counters reasonably priced compared to the frontier and local industry peers. However, we also find Stan Chart (Expected KES 24.00 FY’23 DPS), and NCBA (Expected KES 5.00 FY’23 DPS) as good dividend plays but have reservations about their current share price, which we do not find attractive entry points.
