Capital Markets

Financial stocks seen rallying as banks cut costs

kcb

A KCB branch in Nairobi. London-based investment bank Exotix says in a report that local financiers focus set to be on retail sector and SMEs. PHOTO | FILE

A UK-based banker has forecast bullish times for financial stocks, with banks expected to reduce costs and increase penetration in the retail, small and medium enterprise sectors.

London-based investment bank Exotix says in its latest report that Kenya’s financial institutions are likely to reduce cost-to-income (CTI) ratio, one of the mostly widely used methods to measure the performance of a bank, as they grow their income.

It forecasts the ratio in the coming two years will drop to about 43.5 per cent from the current 50.2 per cent, thereby lifting performance of the stocks.

The analysis by Exotix in collaboration with Equity Bank focused on five banks—CFC Stanbic, Co-op, Diamond Trust, KCB and NIC. Another positive recent study by Old Mutual Securities focuses on KCB and StanChart.

Exotix quoted the managements of the five banks as putting focus on the retail sector and SMEs.

“From a strategic standpoint, our discussions with management indicate that they are seeking to grow their exposure to the under-penetrated retail segment,” said the report that recommends “hold” on the stocks.

The five banks, according to Exotix, are keen on the SMEs and retail sector “in order to mitigate significant declines in their margins which have been impacted by increasing competitive and regulatory pressures.”

It says lending to the retail sector will be boosted by the fact that information on good borrowers is now available following amendments to the law.

“Banks will therefore become increasingly confident of lending to the retail segment based on the information obtained from a growing Credit Reference database,” said the report.

The analysts note agency banking would help banks understand their clients better in terms of their cash flow as they deposit and withdraw money, thereby helping the lenders to increase exposure to the SME segment.

The Exotix analysis on top notes link-ups with telecom companies has tended to drive the loan accounts which is likely to continue.

“The big driver for the significant increase in loan accounts in 2013 was the introduction of the M-Shwari product (by CBA)… We think this trend is likely to continue as other banks introduce and enhance their own mobile banking products,” said the frontier market-focused bank.

READ: M-Shwari lifts CBA above Equity in loan accounts

Other analysts such as Old Mutual Securities have noted the big funding gap among the SMEs that local banks can take advantage of. They see the small businesses as the source of future growth too.

“There is a big funding appetite among Kenya’s SMEs as they seek to expand to meet growing demand for goods and services within regional market. This opportunity has attracted all key financial institutions as they have recognised that the vast small and medium enterprise market is going to be the source of future earnings,” said Old Mutual. Exotix said the SMEs sector was underpenetrated and could do with more funding as is already beginning to happen.

Even the personal loan segment is under-served by the financial sector, the analysts said.

“The half-year results presentations for all the banks (except for two institutions) indicated that sector exposure to the under-penetrated segment – particularly the SME, personal loans segments – continues to increase,” said Exotix.

On KCB, Old Mutual Securities concluded that it is undervalued and has the potential to rise given its reduction of costs and an energetic management team keen on expansion in the region.