[Kenya] Equity Bank, KCB record highest return on equity, Cytonn report
Cytonn Investments has released its 2019 first quarter Banking Sector Review, which highlighted the performance of the listed banks in Kenya following the release of the quarter one 2019 financial results.
As per the report, banks had an improved performance on aggregate, as they recorded improved profitability, in a relatively tough operating environment, thus highlighting the resilience of the sector.
The report, themed ‘Consolidation and Diversification to drive Growth’, analyzed the first quarter 2019 results of the listed banks.
“We note that the increased emphasis on operating efficiency by banks seems to be bearing fruit, with the listed banking sector’s operating efficiency improving year on year which was further supported by a recovery in interest revenue, largely supported by the asset re-allocation to government securities, and increased lending to specific segments”, said Caleb Mugendi, Investment Associate at Cytonn Investments.
“The continued focus on alternative banking channels continues to boost banks’ Non-Funded Income (NFI), as well as reduce the staff and branch expenses. There are four key drivers in the sector namely; are regulation, diversification, consolidation and asset quality in this report. With a tighter operating environment, diversification of revenue, cost management and asset quality management will prove to be the key growth drivers for players in the banking sector”, added Caleb.
“With the deteriorating asset quality, evidenced by the rising non-performing loans, we expect banks to continue employing prudent loan disbursement policies, and consequently tighten their credit standards, in order to address these concerns around asset quality.
“The tough operating environment has made it hard for the smaller banks that do not serve a niche. Therefore, as has been the case recently, we are likely to see more consolidation activity, as larger banks acquire the smaller players in the sector, who are constrained in capital, as they seek to grow their market share, penetrate new market segments and expand their product offerings. We expect to see mergers and strategic partnerships between banks, aimed at creating larger entities with sufficient capital base to pursue growth as well as increase their respective competitive edge and pricing power. The residual effect will be a stable sector with well capitalized players able to catalyze economic growth as well as withstand any systemic shocks,” said Ian Kagiri, Investment Analyst at Cytonn Investments.