Ideas & Debate

Earnings season shines spotlight on stocks

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An investor monitors trading on the electronic board at the NSE. A large number of listed companies will soon be announcing their full-year results for 2013. FILE

We are now entering the reporting season at the stock market when a large number of listed companies will be announcing their full-year results for 2013. A smaller number will also be reporting half-year results.

Leading the pack will be financial sector companies that are obligated under the law to have December 31 as their financial year-end and are also required to publish their results by March- for both listed and private firms.

It means that all companies regulated by the Central Bank of Kenya, the Capital Markets Authority and the Insurance Regulatory Authority are now busy finalising their accounts for 2013.

Given the central role that finance plays in any economy, the health of the industry is going to be of great interest to us all. First off in 2013 interest rate pressures were lessened as the Central Bank (CBK) lowered its key benchmark rate delivering much needed relief for the banking sector.

Typically in periods of high interest rates, banks, more so the small lenders, suffer huge deposit cost pressures some of which cannot be passed on to borrowers.

It is a nerve-racking time to be a treasurer in a bank where you are constantly being bombarded by demands from depositors for ever higher interest rates and at the same time your boss wants you to somehow balance the books on a daily basis without losing money.

As interest rates decline there is an opportunity to lower deposit rates first and thus expand interest rate margins. This results in a brief period of strong earnings recovery and inevitably comes with a public outcry for banks to behave more sensibly by lowering the cost of loans.

So most banks will report healthy profit growth for 2013 as compared to 2012 and for those listed on the exchange their shareholders will on average pocket more gains.

READ: Bank stocks surge propels NSE past Sh2 trillion mark

Declining interest rates are also a boon for insurance companies on two fronts. As rates decline, the performance of their investment portfolios enjoy a turbo boost of sorts in tandem with rise prices of their assets.

The stock market recorded a stellar year in 2013 as equity and bond prices rose particularly in the second half of the year thanks to a peaceful election in addition to lower rates.

Clearly the foreign investors were much relieved by the election outcome and dominated trading activity injecting much needed liquidity into the equity market.

On the second front insurance companies benefit as individuals and businesses acquire assets particularly via bank financing where property insurance is mandated.

As economic activity picks up, all other forms of insurance contracts start to gain traction in the marketplace and underwriters then enjoy a period of healthy premium growth.

The big issue for the sector is operating costs, as far too many underwriters operate at the industry margin earning low returns on their shareholder funds.

These competitive pressures result in a peculiar situation of companies underpricing and threatening their own existence. Greater discipline in the insurance sector is required to secure its growth and contribution to the economy.

Thankfully, the task should be much easier as the economy continues to perform strongly, negating the need to base business strategy solely on price undercutting.

As for capital market players, the situation could not have been better. Securities trading thrives in situations of uncertainty and changing themes.

The year 2013 started off slowly as the aftermath of the 2007 election weighed heavily on investors; the implications of a sitting President and Deputy President as ICC indictees being unclear. But until now the ICC process continues without impeding government.

The evolving circumstance of Kenya 2013 offered a rich narrative to stimulate trading and boost revenues.

As the results start streaming in from this week it will be interesting to note who the winners and losers were.

Mr Bunyi is a financial analyst at Mavuno Capital.