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Bank stocks stumble below fair value after fall of lenders

Dubai Bank branch on Kenyatta Avenue in Nairobi on August 17. PHOTO | FILE
A branch of the collapsed Dubai Bank on Kenyatta Avenue in Nairobi. PHOTO | FILE 

Commercial banks’ share prices on the Nairobi Securities Exchange (NSE) have been depressed by negative sentiment arising from the collapse of three lenders in the space of nine months, analysts at investment bank Kestrel Capital say.

Referring to the fall of Imperial, Dubai and Chase banks between last July and April, the analysts said stocks such as Equity, KCB and Cooperative banks had been “oversold”, meaning that their prices are now below fair values.

In particular, KCB and Co-op have lost 33 and 29 per cent of their value respectively in the past six months. Equity share losses have accelerated in the past three months to five per cent.

Some of the banks - including CfC Stanbic and NIC- and mortgage lender Housing Finance are even trading at less than their book value, Kestrel noted. This is despite the banks having had consistent positive financial performance over the years.

“We believe that the market has oversold the three banks on account of the negative sentiment following the closure of three banks, the crisis in South Sudan and the effects of the high interest rates in the second half of 2015,” said Kestrel in a note to investors. “We recommend a buy on Equity with a fair value of Sh47.18, a buy on KCB with a fair value of Sh49.22 and a buy on Co-op with a fair value of Sh20.58,” Kestrel said.

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Good entry point

Oversold is a condition in which the price of an underlying asset has fallen sharply, and to a level below where its true value resides. This condition is usually a result of market overreaction or panic selling.

Assets that have experienced sharp declines over a brief period of time are often deemed to be oversold.

Analysts have noted the bearish market is a good entry point for savvy investors banking on a reversal that will put them in the money. Foreign investors have been buying on the cheap in recent times with net inflows in million of dollars in the past two months.

The decision by the Central Bank of Kenya (CBK) to instruct an audit of all insider loans signalled concerns over corporate governance in the banking sector.

Kestrel said the next year’s General Election is likely to depress lending by banks impacting on their loan books.

“In 2017 we see risks emanating from slowing loan book growth as we approach the election period. In 2017 and beyond, we see profit growth continuing owing to increased reliance on IT systems and scale benefits from the impending consolidation in the industry,” it says.

Kestrel however expects lenders in the country to report improved earnings this year should interest rates remain relatively stable.

ir nature, are highly leveraged suggests that the improved performance will be magnified,” added Kestrel.

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