Kenya's `Own Goal' Seen Depressing Bank Stocks Until Vote

  • Kenyan bank shares dropped an average of 14% in January
  • Consolidation, job cuts and bank failures possible in 2017

Kenyan banks will probably have to cope with interest-rate caps that have dented earnings and curbed lending until after elections, adding to pressure on their stocks after the worst January in at least five years. 

The 11 listed Kenyan banks dropped an average of 14 percent in January, with KCB Group Ltd., Equity Group Holdings Ltd. and HF Group Ltd. leading the decline. Caps on the amount banks can charge for loans, introduced in September, are being blamed for the slump.

“The rate-cap legislation has been a massive own goal in terms of stimulating growth,” Razia Khan, head of Africa macro research at Standard Chartered Plc in London, said by phone. “The near-term outlook for bank returns is not very positive at all. What’s happening is draconian, but it’s unlikely there will be changes before the August elections. ”

Kenyan President Uhuru Kenyatta approved the caps, against the advice of the country’s central bank and the Treasury, to fulfill a campaign pledge he made before coming to power in 2013 that he’d lower the cost of loans. It’s failed to rejuvenate private-sector credit growth, which slowed to a 16-month low of 4.3 percent in December from 18 percent a year earlier. The 56-year-old leader will seek a second term in this year’s vote.

The cap was a “highly politicized decision,” said Robert Besseling, an executive director at Exx Africa in Johannesburg. In addition to that law, Kenya is now contemplating restrictions on commercial-bank deposits by state-owned companies to improve the government’s cash management.

More Selling

There’s “space” for bank stocks to fall further, said Abizer Sharafali, senior research analyst at Nairobi-based Apex Africa Capital Ltd. “There is still some selling left in the market, especially if you look at blue chips like KCB, Barclays Bank of Kenya Ltd., Standard Chartered Bank Ltd. and Equity.”

Lenders in East Africa’s biggest economy will start to release 2016 earnings this month, giving investors their first chance to asses the fair value of the stocks since the caps were put in place. KCB dropped 2 percent on Wednesday to extend losses over the past 12 months to 37 percent, while Equity Group rose 0.9 percent to pare its decline over the period to 32 percent.

The drop in bank valuations may spur consolidation, something Central Bank of Kenya Governor Patrick Njoroge says he wants for the industry. Kenya has had three bank failures since August 2015 and with 42 lenders, boasts more banks per capita than South Africa, the continent’s most industrialized economy.

Some of the banks “will become prime targets for foreign acquisitions or forced sector consolidation,” Besseling said. “The CBK hopes that stricter capital requirements will force takeovers and mergers to create larger and more resilient financial institutions that will be able to offer lower interest rates on loans.”

South African lenders FirstRand Ltd. and Nedbank Group Ltd. have already expressed an interest in making acquisitions in the Kenyan market. While valuations for banks in that country have declined, the Kenyan shilling has weakened 2.2 percent against the dollar since Kenyatta signed the law capping rates, to trade at its weakest level in 16 months in January. The International Monetary Fund said the caps may cut as many as 2 percentage points off Kenya’s growth rate in 2017.

Mauritius probably offers “the greatest investment potential” among banking stocks in the island country, Nigeria and Kenya, Craig Metherell, sub-Saharan African banks analyst at Avior Capital Markets in Cape Town, said in a note to investors. Kenyan bank stocks face a “difficult 2017” with limited growth opportunities, according to the note, which rated both KCB and Equity, the East African nation’s biggest lenders, as a hold.

“We expect competition to intensify as banks seek to grow their balance sheets in an environment where private-sector credit and deposit growth have slowed significantly,” he said in an e-mail. “The bigger banks believe they will benefit from a flight to quality as the sector undergoes these fundamental changes. There is always concern that the smaller banks will face difficulties.”

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