Columnists

The kind of bank investors should give a wide berth

bank

In line Customers in a banking hall. FILE PHOTO | NMG

The revelation by the Central Bank of Kenya (CBK) that it received requests from 16 banks to raise fees on products, both existing and new—and turned down requests from 13 —is startling. Indeed, this latest disclosure further concretises my belief that banks are increasingly becoming reluctant to adjust to the Banking (Amendment) Act, 2016.

Instead, they are choosing to spin around like the proverbial athlete who just wouldn’t throw the discus. I mean, they’ve been grooving around: branch closures, opening of voluntary early retirement windows and seeking to escalate product fees.

A couple of weeks ago I was in a call with one of the banks and when I inquired about business volumisation strategies going forward (now that lending margins have excruciatingly softened), they gladly informed  that they would continue investing in Treasury securities as long as they can’t appropriately price risk.

In short they meant “sorry, we are unable to adjust to the new operating environment”. The fact is that this market remains loan-driven, with annuity income from loans and advance accounting for 40 per cent of banks’ gross revenues (and 75 per cent of all funded revenues). If you aren’t lending, then you are toying with obsolescence.

Consequently, such statements attract heavy valuation discounts from me (I don’t buy). Indeed, the CBK governor was quite right when he advised banks to instead focus on solving customer problems, something which stands to attract sustainable revenues—instead of looking for short cuts. In fact, he wants banks to review and scrap all these “nuisance fees” imposed. Thank you—what a governor!

So, for investors, here’s my re-run of a three-pronged checklist of your investment case in bank stocks.

First, because business is now volume-driven, look out for clear-cut business volumisation strategies. And business volumisation is now more internal (than external). I mean is the bank mining its existing clients’ wallets enough—which entails making sure that client(s) are utilising the full product suite available in their various segments.

If it’s a retail bank it’s about making sure the client buys your insurance, sells/buys shares in the stock market via your in-house intermediary, has your credit card, has your debit card, has downloaded your app and is actively transacting on it, meaning you own all his/her life aspirations—whether its home ownership, personal car ownership—and if client has FX needs, the bank is there with the right products.

For the high networth clients—it’s about making sure wealth management is core part of the relationship. All this involves having the right platforms; bancassurance, capital markets presence, cash/asset management, a cross-sell centric sales team, top-notch and round-the-clock service support. For the corporate and SME banks, the story is totally different.

Second check if the bank is working towards achieving a cost-to-income ratio of 40 per cent—and not through rushed decisions on staff lay-offs; but rather through a mix of high quality right-sizing initiatives. Specifically, if you see concerted efforts towards relegating the physical network to an alternative channel, then tick the check-box.

Finally, is the investee having transactions lead the way in generating liabilities, and not this penchant for wholesale purchased funds. Often, this strategy, in my assessments, escalates concentration risks on the liability side.

There is a whole strategy around domiciling transaction-driven liabilities. If none of these is appearing in your check-list, don’t engage.

Unfortunately, I haven’t heard any bank display any of these strategies to its investors. The paradox is that bank valuations are up 15 per cent since the year began, which makes me wonder what investors are trading.

Mr Bodo is an investment analyst [email protected]