Banking stock shrugs off rate cap

Investors who placed their biggest bet on their stake in banks or bought them during the turmoil that followed the passing of the interest capping law, are reaping the benefits of their decision.

Shares of 10 of the 11 financiers listed on the Nairobi bourse have recouped hundreds of billions of shillings in losses they incurred during massive panic sale-offs after the Banking (Amendment) Act became law in September 2016.

The ceiling of loan charges at 14 per cent saw risk-averse investors offload their holding in banks, fearing losses as a result of reduced margins since interest earnings accounted for about three quarters of profitability.

Investors in the lenders, who watched as shares sunk to new lows 18 months ago, had booked a cumulative Sh293.96 billion in capital gains by close of trade last Friday, spurred by imminent scrapping of ceilings on loan charges.

This was after the market value of the banks listed on the Nairobi Securities Exchange hit Sh743.40 billion compared with Sh449.44 billion at the height of the rate cap storm.

“The shock that hit many investors following the surprise enactment of interest rate controls in September 2016 greatly hurt performance of bank stocks at the NSE,” Mercyline Gatebi, a senior research analyst at Kingdom Securities said in a market report on banks last Thursday.

“But other investors were undeterred, and saw this shock as an opportunity to even expand their holdings of bank stocks at a huge discount. And they were right.”

The share prices of banks publicly traded on the NSE, except Housing Finance, have soared to pre-rate cap levels.

Three of them – KCB Group, Co-operative and Equity –  have seen shares zoom to nearly double their values 18 months ago, an analysis of their price movements shows.

KCB Group, the largest by market share, has gained the most with its shares trading at Sh48.75 on Friday, a jump of 98.98 per cent compared to Sh24.50 lows when the they were on a free fall due to fears of reduced returns during the early days of rate capping.

KCB, whose full-year profit flattened at Sh19.7 billion, has seen its market value nearly double to Sh149.47 billion from Sh75.12 billion lows in post-rate cap period.

Investors in Co-operative Bank booked the second biggest capital gains in the review period at 92.82 per cent to Sh18.80 per share, while Equity’s share price soared to Sh47.75 per unit, an 87.25 per cent gain.

I&M Holdings, NIC Group and Diamond Trust Bank share prices have all bumped by more than half at 60, 56.25 and 55.56 per cent, respectively, to Sh120, Sh37.50 and Sh210 per unit post-rate cap.

Barclays, whose Johannesburg-based parent Barclays Africa Group has started a rebranding to Absa Africa, has seen its shares rise by 40.51 per cent to Sh11.10 per piece by Friday. 

The shares of state-owned National Bank of Kenya, UK-controlled Standard Chartered Bank and Stanbic Holdings, majority-owned by South Africa’s Standard Bank Group, have climbed 34.38, 17.42 and 14.69 per cent to Sh8.60, Sh209 and Sh82 per unit, respectively.

Housing Finance, a predominantly mortgage financier, is the sole NSE-listed lender to have booked losses on its share price at 29.77 per cent to Sh10.50 apiece.

“The banks have strengthened markedly … after the IMF specifically called on the government to repeal the rate cap Act. The rate cap has staunched private sector credit growth and investors are calculating a repeal will encourage banks to lend again and increase their profitability” Aly-Khan Satchu, the chief executive of investment advisory firm Rich Management, said in an email on March 1.

The International Monetary Fund has successfully demanded the Treasury commit to scrap the caps on loan charges before it extends the $1.5 billion (Sh151.8 billion) standby currency cushion facility by six months from next week as requested by Kenya.

“The authorities have committed to policies that will help achieve the programme objectives, including reducing the fiscal deficit and substantially modifying interest controls,” IMF team leader Benedict Clements said in a statement last Thursday following completion of a three-week review mission. “Discussions on the details of these policies will continue in the coming weeks.”