Renaissance Capital has rated the stocks of the three largest listed banks in Kenya as undervalued by between 15 and 30 per cent, based on their current price-to-book ratios that are below their historical lows.
Rencap banking analyst Olamipo Ogunsanya says in the firm’s latest note that KCB, Equity Bank and Cooperative Bank have an upside of 28, 25 and 15 per cent on current prices over a two-year horizon, with all three trading at levels last seen in 2012.
It has given a target price of Sh33 for KCB, Sh33.9 for Equity and Sh16 for Cooperative bank arguing the current market conditions will preserve their margins.
KCB is currently trading at a trailing price to book ratio of 0.9 times, compared to 2.7 two years ago.
Equity’s ratio stands at 1.5 times from 3.6 times two years ago, while that of Cooperative Bank has gone from 2.3 times to 1.3.
Price-to-book ratio (or P/B Ratio) is used to compare a stock’s market value to its book value.
“We find that price to book valuations of the banks in our coverage universe are below their seven-year historical lows, suggesting to us that there is some upside risk from here,” said Mr Ogunsanya in the note.
Bank stocks have been among the hardest hit in the market during the prevailing bear run, with all 11 listed lenders recording a double-digit percentage share price fall year-on-year.
KCB, Equity and Cooperative Bank have over the one-year period shed 38.7 per cent, 34.6 per cent and 32.8 per cent respectively in share price since February last year.
Mr Ogunsanya said the main concern for the sector is regulatory risk, coming in form of capping of interest rates which has a negative effect on the net interest margins (NIMs) of banks, by up to 100 basis points, according to Rencap.
Investors may have overplayed the negative effect so far in their valuation of certain bank stocks, given that the lenders have had the option of lending to government, and the risk of a further base rate cut has diminished due to higher inflation and a weaker currency.
“On average, we expect NIMs will fall by 100 basis points year-on-year across the three banks. We see some upside risk to our margin forecasts because current macro conditions seem to support the case for a higher-yield environment, in our view,” said Mr Ogunsanya.
“We also expect increased government borrowing to provide support for interest rates at current levels. Furthermore, given recent exchange rate volatility and a decline in reserves, we do not expect monetary policy to ease in the short term.”
The larger banks, due to their advantage of having wider deposit bases, were already charging lower rates than their smaller counterparts that were forced to pay more for deposits and in turn charge higher for loans to enjoy a good margin.
They have also avoided the liquidity shortfalls that have bedevilled their smaller counterparts since the collapse of three small tier lenders and are thus not taking up expensive short-term financing as often.