Are you a fan of bank stocks?
If so, you’ll find the Nairobi Securities Exchange is chock full of them.
Nine of the largest 15 Kenyan shares are banks, and a total of 10 are listed on the market.
So which Kenyan bank stocks offer investors the best value? Let’s have a closer look.
The first thing I’m on the hunt for in a bank stock is profitability. How much money does a bank make off of the assets that have been entrusted to its care?
Return on assets (ROA) is the simplest bank profitability metric. To calculate it, divide earnings by the average of the bank’s assets at the beginning of the year and its assets at the end of the year.
You’re left with a percentage that shows how much profit the bank earns from each shilling’s worth of assets. The higher the percentage, the more profitable the bank.
Here are Kenya’s five most profitable banks in 2013.
1. Equity Bank (ROA: 5.1%)
2. Standard Chartered Bank of Kenya (ROA: 4.6%)
3. Co-operative Bank of Kenya (ROA: 4.1%)
4. KCB Bank (ROA: 4.0%)
5. Barclays Bank of Kenya (ROA: 3.9%)
The next thing we want to consider is growth. Without growth, a profitable bank won’t do much more than send out dividend checks to its shareholders. We want management to be building the business — and profits — over time.
You could measure growth in terms of earnings, but I prefer to measure how quickly the bank is expanding its asset base. A growing asset base reflects a bank that is either very good at attracting customer deposits, obtaining outside financing, or both.
Below are Kenya’s fastest-growing banks over the past 12 months.
1. National Bank of Kenya (Asset Growth: 37.8%)
2. CFC Stanbic (Asset Growth: 26.0%)
3. Diamond Trust Bank (Asset Growth: 22.9%)
4. Housing Finance Company Kenya (Asset Growth: 15.7%)
5. Co-operative Bank of Kenya (Asset Growth: 15.1%)
Now it’s time to factor in some risk.
Some banks tend to be more aggressive than others when making loans. This can pay off in the form of greater profits, but it can also hurt the bottom line if a borrower defaults.
Kenyan banks are required to report their non-performing loans (NPL) each quarter. We’ll divide these bad loans by the banks’ average assets to determine which ones have done the best job at keeping this risk under control.
Here are the top five.
1. Diamond Trust Bank (NPL Ratio: 0.8%)
2. Standard Chartered Bank of Kenya (NPL Ratio: 1.5%)
3. Barclays Bank of Kenya (NPL Ratio: 1.8%)
4. Co-operative Bank of Kenya (NPL Ratio: 2.5%)
5. Equity Bank (NPL Ratio: 2.9%)
We’ve covered some of the important fundamentals. Now, let’s see which banks trade at the most affordable prices.
To do this, we will rank them by price-to-book ratio. The price-to-book ratio is calculated by dividing the bank’s market price by its net assets. The lower the ratio, the more affordable the price.
But be careful not to view this metric in isolation. Sometimes, stocks trade at low price-to-book multiples for good reasons (slow growth, poor asset quality, etc.).
Here are the Kenyan banks with the lowest price-book ratios.
1. CFC Stanbic (P/B Ratio: 1.3)
2. Housing Finance Company Kenya (P/B Ratio: 1.5)
3. NIC Bank (P.B Ratio: 2.0)
4. KCB Bank (P/B Ratio: 2.2)
5. Co-operative Bank (P/B Ratio: 2.3)
Finally, let’s take a look at dividend yields. Dividend yield (DY) measures the amount of cash that a company has paid out to its shareholders as a percentage of the current market price. You can think of it like the coupon rate on a bond.
I like to take it into consideration when evaluating banks because it is a function of profitability and value.
Here are Kenya’s highest-yielding banks.
1. Housing Finance Company Kenya (D/Y: 5.3%)
2. Equity Bank (D/Y: 4.7%)
3. KCB Bank (D/Y: 4.3%)
4. Standard Chartered Bank Kenya (D/Y: 4.1%)
5. Barclays Bank Kenya (D/Y: 3.7%)
So, what do all of these top five lists tell us?
Well, it’s not an exact science, but the banks that show up on multiple lists are doing multiple things right. They are the best blend of profitability, growth, asset quality, and value.
And, if we look closely, there is one bank that shows up on four of the five lists – Co-operative Bank of Kenya.
Co-op Bank is Kenya’s third-largest bank in terms of assets and focuses on retail clients. It’s grown rapidly in recent years and has begun to expand beyond its home borders. It opened 20 new branches in South Sudan last year.
I expect its asset growth to continue in the medium-term as it uses its wide branch network to attract deposits from Kenya’s under-banked locales.
What do you think of this quick method to survey a market’s bank stocks? Let’s hear your thoughts in the comments!
Ryan Hoover is an investment analyst with Africa Capital Group and the founder of InvestingInAfrica.net. Contact him at ryan@investinginafrica.net.
