Shares of the top five large banks listed on the Nairobi Securities Exchange are cumulatively trading at 14.6 per cent below their fair value, a quarterly survey by Cytonn Investments indicates..
The evaluation, based on their valuation as at September 8, used profitability, efficiency, growth, asset quality, liquidity, revenue diversification, capitalisation and intrinsic valuation to rank the 11 lenders listed on NSE in terms of efficiency.
Their intrinsic (actual) value accounted for 60 per cent of the weighting, while the franchise value made up the remaining 40 per cent as at end of June.
Based on historical and future performance, Equity topped in attractiveness to investors climbing from position four last quarter, while its stock was undervalued by 27.2 per cent at Sh50.3 per share on September 8.
Cytonn researchers cited a return on equity of 30.5 per cent, net interest margin of 10.5 per cent and the share of non-interest income at 41.1 per cent of total revenue in ranking it top.
Planned acquisition of a controlling stake in ProCredit bank of DRC and the launch of its telecoms arm, Equitel, further improved its attractivenesses, Cytonn concluded.
Standard Chartered ranked second, followed by KCB, Barclays and Co-operative Bank. KCB stock was undervalued by 34.8 per cent at Sh57.40 share price, while Stanchart and Barclays banks were undervalued by 21.8 and 20.7 per cent, respectively, at prices of 263 and 13.50 per share.
Co-operative Bank was the only tier-one lender that Cytonn analysts thought was overvalued by 6.1 per cent at the price of 16.50 per share, based on their ranking metrics.
NIC and Diamond Trust Bank were the only ones found to be undervalued by 4.2 and 2.5 per cent at a price of Sh47.60 and Sh206.50 per unit, respectively, among the six listed mid-tier banks that had a downside of 15.7 per cent.
National Bank was deemed to be the most overvalued banking stock to the tune of 63.50 per cent on low quality of assets and high cost to income ratio.
CfC, I&M and Housing Finance were believed to be overvalued by 20.8, 15.6 and 4.7 per cent respectively.
Barclays was the most improved, ranking fourth from ninth position partly on its SMEs strategy, Co-operative climbed to position five from seven while NIC moved to sixth from eighth.
CfC Stanbic posted the worst drop, slumping from position one during the first quarter to position nine after its cost to income ratio rose to 60 per cent compared to industry’s average of 48.1 per cent
“There are concerns as to whether banks will be able to maintain their profitability margins with the increase of the CBR to 11.5 per cent,” the report states.
It says that with the exception of minimal increases in non-performing loans banks are unlikely to be impacted significantly by the increases as they have been fairly good at protecting their margins regardless of the rate environment.