Kenyan banks stocks are brazing off increased head winds caused by interest-rate caps, that have cut their main source of income and ended a decade-long earnings boom, to lead a market bull run that sparked off in March.
On August 25, 2016, Kenya’s financial markets were shocked after the President unexpectedly passed into law a bill capping rates at four percentage points above the 10 percent Central Bank Rate (CBR) and putting a floor on interest paid on deposits at 70 percent of the CBR.
Six out the 11 listed banks at the Nairobi Securities Exchange (NSE) hit their year low in just two trading sessions after the law was passed. The financial segment of the bourse was dragged even lower in the next few months as foreign investors exited.
While the shares recouped some of their losses in the following weeks, predictions were that banking stocks will have to bear with the interest-rate cap up until after the August election, where expectations are that the government could remove the caps.
Bank shares have “climbed a wall of worry” since March in a rate cap that has rationed credit to borrowers, an upcoming general election and a sharp slowdown in private sector credit growth. Data from the statistics office showed that credit in the east African nation grew at 3.3 percent in first three months of this year, the slowest pace recorded in more than a decade.
A Chase Xpress branch
All these in the wakeup of the closure and collapse of three mid-tier banks – Imperial Bank, Dubai Bank and Chase Bank – that forced many local banks to increase their loan-loss provisions in 2016 amidst strict supervision from a hawk-eyed central bank.
The recovery in banking stocks, helped by dividend hunting investors, has lifted the Nairobi All Share Index 30 percent since March 9, according to Quantextive Data. The index has pared losses registered in the first quarter of the year, when it was ranked the worst performing in the world, and is up 15 percent in 2017 and at a two-year high.
Source: Nairobi Stock Exchange via Quantextive
“The rally has been broad-based and has gathered momentum. A lot of folks [particularly in the banking stocks] are chasing dividends [in many cases double digit ones], so we will surely walk into a correction in these shares when the dividends are paid,” Aly Khan Satchu, an independent analyst, said in a market round-up report.
The rate cap law still poses a risk that was flagged up by the IMF and the World Bank and affected lenders earnings in the first quarter of this year.
Commercial banks have now turned to buying government debt to compensate for the loss in interest income as indicated in their first quarter earnings releases.
“For the banks, government paper is treated as “risk-free” on their balance sheets and anything within 200 basis points of the rate cap has looked a “no-brainer”, Satchu added.
In the long term, bank stocks are seen as attractive investments once the quality of assets improves on the back of regulatory and operational changes. These changes are likely to create a “safer and attractive” banking industry that will lure investors into listed banks stocks, according to investment firm Cytonn.