Bank on Banks Stocks in the Next 5 Years

The first half of the year 2007 saw many banks release their profitability results with many declaring good dividends followed by bonuses and even rights issues. Over the last few years Kenyan banks haven been on a profitability path and the momentum is not likely to be lost soon.

In 2006 the industry grew by 39.7 per cent to Shs 12.6B in the first half of the year up from Shs 9 B in 2005 over the same period.

Macro-economic Environment

The banking industry has been doing well since 2003 with indications that the momentum will be sustained over the next five years. Buoyed by favorable macroeconomic environment that encompass the stable inflation, exchange rate and interest rates. Kenya's robust banking industry may have improved tremendously in terms of size, profitability and product offering over the last 10 years but the growth does not reflect in the country's overall development despite the 6.3% growth realized in 2006/07 financial year. This is because despite news that the poverty index now stands at 46% it is evident that many are still living in abject poverty with nagging family obligations.

High fees and Interests rates

The emergent news on profitability by banks may be good news to stock punters but consumers of financial services are paying the highest price for borrowing little money from commercial banks. Further customers are continually being charged high account maintenance fees alogside other non interest charges that have compounded a bigger portion of banks profitability pie. This comes in the wake of recent calls by the CBK to banks to significantly reduce their interest rates on loans. This was followed by threat to name and shame the offenders but this seems to have fallen on deaf ears. Equity bank however did cap loan processing fees from 18% to 15% in response to CBK directive.

Growth

The new report indicated that the total assets for the banking sector grew from Ksh328 billion (US$482 million) in 1997 to Ksh746 (US$1.4 billion) in 2006, representing a 132% increase.
Similarly, profitability rose from Ksh 15 billion (US$23 million) in 1997 to Ksh 27 billion (US$41 million) in 2006. Their growth is expected to be sustained with still a small fraction of kenyans having bank accounts.

Finance Bill

The budget for 2007/08 financial year however has brought a new challenge of capitalization to Microfinance Institutions (as well as banks alike). MFIs had been pushing for the passing of the Microfinance Bill that would see these Small and Medium Enterprise (SMEs) lenders accept deposits among other things.

The finance bill stipulates inter alia to increase the minimal capital requirement for commercial banks from Ksh250million to Ksh1 billion within the next three years.

Mergers and Acquisitions

The move to increase capital requirements for banks is likely to precipitate moves for Mergers and Acquisitions (M&A) in the banking industry once the bill is enacted. CFC and Stanbic had already led the way and who knows with Equity acquiring 24% of Housing Finance they might push for a merger of this fast growing lender currently dogged by controversy and the mortage company.

Oligopolistic Tendencies

Three major banks, Barclays, Stanchart and KCB have dominated the banking sector, controlling between 40 and 50 per cent of the market throughout the past ten years leading a pack of more than 40 banks.

In terms of market share, the top five banks last year were Barclays Bank at 16 per cent, KCB at 13 per cent, Standard Chartered at 11 per cent, Co-operative Bank 8 per cent, Commercial Bank of Africa 5 per cent and National Bank of Kenya 5 per cent. The top ten players control more than 75 per cent of the market, with the remaining 32 sharing the balance. Bankelele has provided an avid analysis of the Kenya banks ranking.

Bank Stocks

With Banks profitability on the rise and their ambitious expansion programs to other markets coupled with mergers and acquisitions, investors will never go wrong banking on the stocks of the listed banks in the long run. These encompass Barclays, KCB, Stanchart, ICDCI (You can check my earlier analysis on ICDCI), CFC, NIC, Housing Finance, NBK, and DTK.

Buy hold and make money!