Capital Markets

Bank stock valuations slide below historical averages

NSE

Bank stock valuations have fallen below their historical average as the shares take a hit from the Covid-19-led downturn. FILE PHOTO | NMG

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Summary

  • Bank stock valuations have fallen below their historical average as the shares take a hit from the Covid-19-led downturn, making their current prices attractive for buying.
  • Nairobi-based investment bank Genghis Capital says in a coverage note on six tier one lenders that it expects earnings for the year will drop by an average of 11.9 percent, mainly due to an increase in provisioning and depressed income growth from risk-off asset strategies and restructured loan books.

Bank stock valuations have fallen below their historical average as the shares take a hit from the Covid-19-led downturn, making their current prices attractive for buying.

Nairobi-based investment bank Genghis Capital says in a coverage note on six tier one lenders that it expects earnings for the year will drop by an average of 11.9 percent, mainly due to an increase in provisioning and depressed income growth from risk-off asset strategies and restructured loan books.

However, the analysts expect that in the long term there will be a recovery as the quality of loan books improves with the return to normalcy of the economy.

“While Return on Equity (RoE) will remain depressed in 2020, our long-term RoEs are expected to recover substantially in the years post-pandemic from the growth in the balance sheets and subsiding provisioning levels,” said Genghis analyst Gerald Muriuki in the note.

Since the beginning of the year, banks’ share prices at the NSE have dropped by between 18 and 42 percent, while the need to preserve capital has seen a number of lenders track back on proposed dividend payments, further hurting their shares’ performance.

The Central Bank of Kenya said on Wednesday that by end of June banks had restructured Sh844.4 billion loans for customers affected by the Covid-19 economic effects, equivalent to 29 percent of the total banking sector loan book of Sh2.9 trillion.