Six out of the 11 banks listed on the Nairobi Securities Exchange (NSE) have seen their share price fall further from the lows seen on August 29, three trading days after the law controlling interest rates was signed.
The other five lenders have registered price gains over the same period, underlining the uncertainty surrounding the industry’s future performance at a time of increased regulation.
Analysts say investors are now balancing between fear of further losses and risk of missed opportunity given that the sharp price declines have raised dividend yields and set the base for potential capital gains over the next few years.
Investors in banking stocks have shown mixed expectations of the sector’s short to medium term performance ahead of announcement of 2016 full-year results that will partly capture the impact of controlled interest rates.
Barclays Kenya was the first lender to release full-year results Wednesday, with others expected to follow suit in coming days.
Six out of the 11 banks listed on the Nairobi Securities Exchange (NSE) have seen their share price fall further from the lows seen on August 29, three trading days after the law controlling interest rates was signed.
These are DTB (down 22.4 per cent), HF (17.3 per cent), NBK (14.1 per cent), Stanbic Holdings (7.5 per cent), Barclays Bank of Kenya (4.5 per cent) and I&M Holdings (2.5 per cent), based on Wednesday’s mid-session trading prices.
The other five lenders have registered price gains over the same period, underlining the uncertainty surrounding the industry’s future performance at a time of increased regulation.
The gainers are Co-operative Bank (25.1 per cent), NIC (11.4 per cent), Standard Chartered (6.8 per cent), KCB (two per cent), and Equity (0.9 per cent).
Further losses
Analysts say investors are now balancing between fear of further losses and risk of missed opportunity given that the sharp price declines have raised dividend yields and set the base for potential capital gains over the next few years.
“We believe investors’ concerns around the Kenyan banks mostly stem from the fact that the implementation of the interest rate cap set a precedent for regulation-induced risks in the sector,” Renaissance Capital said in a research note.
“We find that price-to-book valuations of the banks in our coverage universe are below their seven-year historical lows, suggesting to us that there is some upside risk from here.”
The mainstay interest income is expected to take a hit from relatively lower interest rates and higher deposit rates following the commencement of the Banking (Amendment) Act 2016.
The law sets the floor for deposit rates at 70 per cent of the Central Bank Rate and a ceiling for lending rates at four percentage points above the benchmark rate which is at 10 per cent.
This places the current interest rate on interest-bearing accounts at a minimum of seven per cent and the lending rate at a maximum of 14 per cent.
Standard Investment Bank (SIB) said the full impact of the new law on net interest income will start to be felt from this year, adding that its influence on individual bank earnings will depend on each lender’s deposit mix and previous average lending rates.
Bad debts
Analysts say a proposal to migrate all government deposits from banks to the Central Bank of Kenya and a planned adoption of new financial reporting standards (IFRS9) will reduce liquidity and increase provisions for bad debts respectively.
The regulatory headwinds have already seen banks cut back their lending to contain risk, dampening expectations that they would respond to the compressed margins by expanding their loan books.
Rising dividend rates is seen as a clear positive for investors, with most of the listed banks indicating yields of above five per cent based on current market prices.
“Guided by our expectation of reduced balance sheet growth, we expect to see increased payout as management seek to optimize return on equity (ROE),” SIB said in a research note, adding that most banks have in the past operated with excess capital.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
