Thursday, October 31, 2019

Bank shares gain Sh38bn in a day on rate cap push

Nairobi Securities Exchange Nairobi Securities Exchange. FILE PHOTO | NMG 
VICTOR JUMA

Summary

    • Owners of banking shares were Wednesday Sh38.3 billion richer after a surge in the ...lenders’ stock on news that Parliament’s finance committee had asked MPs to repeal a cap on commercial lending rates.
    • Eight of the 10 banks listed on the Nairobi Securities Exchange (NSE) gained on what stock dealers linked to increased demand for the lenders’ shares on the expectation of increased profitability and stock gains.
    • Equity Bank CEO James Mwangi, head of Co-operative Bank Gideon Muriuki, the family of the late Central Bank of Kenya governor Philip Ndegwa and the Kenyattas are among the individual investors who look set to gain from a rally in banking stocks.
Owners of banking shares were Wednesday Sh38.3 billion richer after a surge in the lenders’ stock on news that Parliament’s finance committee had asked MPs to repeal a cap on commercial lending rates.
Eight of the 10 banks listed on the Nairobi Securities Exchange (NSE) gained on what stock dealers linked to increased demand for the lenders’ shares on the expectation of increased profitability and stock gains.
This marks the biggest single-day gain by bank stocks in many months, analysts said, in a share price appreciation that started on October 18 when news leaked that President Uhuru Kenyatta had demanded that lawmakers remove the cap on commercial lending rates.
The share price increase gained pace yesterday after the finance committee’s pronouncement, meaning that the wealth of investors owning bank shares has increased by Sh50 billion since October 18.
Investors in Equity gained Sh10 billion Wednesday after the share rose by 6.5 percent, KCB also rose by Sh9.94 billion after the stock increased 6.8 percent while owners of Co-operative Bank saw their wealth rise by Sh4.9 billion. NCBA, which is majority owned by the Kenyatta family, gained 8.5 percent adding Sh4.3 billion to its owners’ wealth, while I&M Bank gained 8.8 percent (Sh3.3 billion), Barclays gained Sh4.3 billion and Standard Chartered Sh1.4 billion.
“We are going to see that excitement building,” said Eric Musau, the executive director for research at Standard Investment Bank. “There is a sense that this will be good for lending growth and banks’ margins.”
The House committee’s backing of the President’s position improves the chances that the cap will be lifted.
Parliament will vote on whether to accept the finance committee’s recommendations on Tuesday. Lawmakers have the option of removing the cap from the Bill or overruling the President if two-thirds of the 349 members vote to override his position.
Equity Bank CEO James Mwangi, head of Co-operative Bank Gideon Muriuki, the family of the late Central Bank of Kenya governor Philip Ndegwa and the Kenyattas are among the individual investors who look set to gain from a rally in banking stocks.
Mr Mwangi’s five percent stake in Equity rose by Sh500 million in a day to stand at Sh8.1 billion while Mr Muriuki’s 1.7 percent stake in Co-operative Bank rose by Sh84.7 million to stand at Sh1.3 billion.
The rally in NCBA, a merger between CBA Bank and NIC Bank, saw the worth of the Ndegwa family stake in the lender increase by Sh440 million to Sh5.6 billion while that of the Kenyattas rose by Sh573 million to stand at Sh7.3 billion. The Kenyatta family has a 13.2 percent in the merged bank, which started trading at the Nairobi bourse last week. “We expect banking stocks to rally as their profitability prospects improve following the removal of rate caps,” investment bank AIB Capital said in a research note issued yesterday.
AIB said it expects lending and bank profitability – based on higher margins on loans — to rise if the lending controls are abolished.
In 2016, the government limited the rates that banks can charge customers to four percentage points above the central bank’s benchmark - currently nine percent - saying they were concerned about steep charges. This restricted loan costs to a maximum of 13 percent, triggering a credit crunch as commercial banks cut off millions of low-income customers and small businesses deemed too risk. The cap also made bank stocks unattractive to investors seeking capital gains at the Nairobi bourse.
Before the introduction of rate caps, banks’ interest rates rose up to 25 percent in what guaranteed the lenders double-digit profit and dividend growth and cemented the lenders stocks as crown jewels at the NSE.
Parliament’s finance committee is proposing shielding existing loans from any increases in rates if the limits are repealed, according to its report that was issued late on Tuesday.
Banking sector financial performance data for the past four years shows that the lenders have managed to recover their footing after the initial hit from the rate cap, largely by turning to risk-free government lending and aggressively cutting costs.
Banks raised their investment in government debt paper by more than Sh500 billion to Sh1.5 trillion but have also been met by falling rates on the fixed income securities. Equity and Standard Chartered Bank (Kenya), which have some of the highest cash reserves, are seen as best placed to take advantage of the return to free floating rates.
Investors have been aggressively buying bank stocks in anticipation of the higher earnings, with the biggest lenders posting the largest price gains. The biggest beneficiaries of the bank stocks rally include pension funds, wealthy individuals and foreign institutional investors who hold stakes running into billions of shillings. Further price gains on banking stocks in the coming weeks could help the Nairobi bourse reverse some of the paper losses in the bear market that has lasted five years. Safaricom, which together with banks account for 80 percent of the value of the Nairobi bourse, also rallied to hit highs of Sh29.60 yesterday, up from Sh28.90 on Tuesday.

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