Banks stocks on the up following days of rout

Money Markets

Stock traders at the Nairobi Securities Exchange. Almost all bank stocks rose by the allowable 10 per cent margin in a day during yesterday’s trading. PHOTO | FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

In Summary

• With banking shares comprising 71 per cent of the market turnover Wednesday, the Nairobi Securities Exchange (NSE) 20 Share Index gained 62.01 points to stand at 3178.83.
• Analysts warned that an equilibrium was yet to be reached because banks were still awaiting some guidelines on the implementation of the new law.

Bank stocks appeared to have bottomed out after days of a rout with nearly all counters rising Wednesday amidst rising orders.

Share prices of Housing Finance, Coop and I&M rose by the highest allowable margin of 10 per cent for a single day but those of StanChart and National Bank of Kenya remained unchanged.

With banking shares comprising 71 per cent of the market turnover Wednesday, the Nairobi Securities Exchange (NSE) 20 Share Index gained 62.01 points to stand at 3178.83.

However, relative to the day of signing of the law restricting interest rates last Wednesday, the banking share prices were still lower.

Analysts warned that an equilibrium was yet to be reached because banks were still awaiting some guidelines on the implementation of the new law.

Among the issues expected to be clarified is the type of deposit accounts to earn the specified minimum interest and whether the base rate to be used will be the Central Bank Rate or the Kenya Bankers Reference Rate.

“The share prices have risen but we have to be careful because an equilibrium has not been reached. They could fall yet again if the new guidelines cause investors to re-evaluate their positions,” said Edwin Chui, research analyst at Dyer and Blair Investment Bank.

Mr Chui said the initial cause of the share price fall was panic by investors, but added that it was not possible to determine whether that fall had reached the bottom.

“There is no need for panic. We expect that banks will still remain profitable and the best case scenario is that their asset quality will improve since they will be more sensitive to risk. Again, many companies that were not borrowing because of costs will go into the market and seek loans,” said Mr Chui.

READ: Banks cite gap in new interest rates capping Act

An analysis of the new banking developments by Exotix indicated that some of the bank shares were still underpriced while others had been immediately overpriced by yesterday’s rally.

Coop Bank rose to Sh11 from Sh10 the previous day, but Exotix has put the short and medium target price at Sh10.30 a share. The analysts also put DTB share price target at Sh138.80, but the actual price averaged at Wedneday’s trading on the NSE stood at Sh142.

Downside re-evaluations

KCB stock was at Sh27.75, having risen 8.8 per cent in a single day with Exotix putting the target price for its clients at Sh27.1 a share.

At its previous price of more than Sh30 a share and following the signing of the new bank law, Exotix asked its clients to sell KCB instead of buying it.

For Coop Bank, the investment bank recommended change from “hold” to “sell.” It maintained a “sell” recommendation for the DTB shares, putting a target price of Sh138.80 against Wednesday’s Sh142.

Exotix however said despite significant downside re-valuations, there was a likelihood that banks would improve profitability in the medium term.

“In the medium term, we think banks should be able to improve their profitability by adapting to the new environment – the net interest margin [NIM] of banks in many frontier countries is lower than our estimates above and banks are still able to achieve reasonably high return on equity (ROEs),” said Exotix.