Capital Markets

Citigroup sees KCB share price taking a hit

KCB

Customers being served at a KCB branch. The lender's net profit for 2014 increased by 18 per cent to stand at Sh16.85 billion from Sh14.34 billion made in 2013. PHOTO | FILE

The share price of KCB Group, Kenya’s largest bank by assets, will directly depend on how the economy performs over the next few months, says a new report by Citigroup’s investment banking arm.

Citi said that since slightly over 80 per cent of the bank’s revenues come from its local operations, Kenya’s general economic performance has a direct relationship with the group’s performance.

The investment bank said its target price for the KCB stock is Sh53 which is below Thursday’s Sh59 closing price. This indicates that the stock is currently at a higher price that is justified by expectations.

“We assign this stock a high risk rating, given the heightened political and economic risk associated with the bank’s primary country of operations. Factors which may cause the company to exceed our target price include better than expected economic growth and loan growth, industry consolidation or a more benign regulatory environment,” said the Citi report.

KCB has subsidiaries in Uganda, Tanzania, Rwanda and South Sudan which were all profitable in 2014, contributing 5.7 per cent or Sh969.8 million of overall profitability.

KCB’s net profit for 2014 increased by 18 per cent to stand at Sh16.85 billion from Sh14.34 billion made in 2013.

READ: KCB Uganda rebound raises net profit to record Sh17bn

The World Bank said that it expects GDP growth for 2015 to be six per cent. This growth will be driven by increased consumption arising from the falling oil price and the State spending in the massive infrastructure projects including the standard gauge railway.

“Rapid growth mainly reflects increased aggregate demand emanating from the fall in oil price and ongoing infrastructural projects,” said the World Bank’s outlook report for 2015.

The new railway is expected to improve Kenya’s competitiveness from next year.

Other analysts have, however, put a higher price on KCB’s stock based on the lender’s increased use of mobile banking and agencies which are bringing down transactions costs.

“The lower than expected cost growth is attributable to the bank leveraging its new IT platform to minimise variable costs,” said a Kenya banking industry report by London-based Exotix.

Exotix has put a target price of Sh62.99. KCB’s management has said that it is mulling expansion into other eastern and central African countries.

Analysts said that expansion into virgin territories will result in the bank making losses from the new areas of operation as judged from when it first penetrated new regions.

“In the past management have indicated their plans for expanding into other east and central African countries. Due to a lack of information, we do not include this in our forecasts. Nonetheless, based on the bank’s experience of expanding into Uganda, Rwanda and Tanzania, we think any further expansion would be a drag on the group’s profitability,” said the report.