Most people might not be interested in the Nairobi Stock Exchange at the moment. But this should be the time to get in. When the market is down and pessimism at its highest.
No counters at the Nairobi bourse will generate as much excitement as banks. Fresh from posting Full Year 2010 super-duper profits, they are massively undervalued.
I will focus on 2 banking giants in our local scene:
In the green corner, weighing in at Kshs. 251 billion in Group Assets is Kenya Commercial Bank.
While in the Red Corner, weighing in at 'only' Kshs.143 billion in Group Assets is Equity Bank.
KCB has for long been known for its inefficiencies and high staff costs. In the past, it has not been able to leverage on its huge asset size to give its shareholders the kind of returns they should be bringing home. Shareholders for the past couple of years have seen their wealth more or less stagnant (not regarding dividends which are pretty good) as other counters in the NSE have created multi-millionaires as a result of massive capital gains.
One of these counters is Equity Bank. Guided by James Mwangi, the bank has been able to grow by leaps and bounds to take it to within the top 3 banks in the country based on Profit After Tax (PAT). It uses a model based on high volume transactions. No wonder it is the bank with the highest number of customers. Its rapid rise in the past few years since being listed by introduction has no doubt created wealth for many shareholders. Indeed, Equity is valued higher in terms of market capitalisation than KCB (92.5B VS 67.8B) It is 3rd overall in market cap, behind Safaricom and EABL. Such is the confidence that the market has on Equity that it traditionally trades at a higher Price To Earnings Ration (P.E) than its peers. In the run-up to the 2011 full year results, Equity was testing a trailing P.E of 27. This has now cooled down to a not so modest 21.93. KCB is trading at a trailing P.E of 8.51. All these as at Monday 28th 2011.
But some have come to the fore arguing that Equity is currently at the optimal growth level. That there is no more room for the hyper-growth it has been experiencing in the last 5 years. It's key market Kenya, seems to be saturated. There are 44 banks in the country and though there is still a relatively high number of unbanked in the country, such a high number of banks means that Equity may not be able to continue to post such a high margin of growth locally.
This is why the bank has been on a major expansion drive. Other than its home market of Kenya, the bank is present in Uganda and Southern Sudan (S.S). The Ugandan unit has yet to break even. But the S.S unit is now very profitable. Equity is the bank that has the most number of customers in S.S though KCB has much more branches. It has plans on going into Tanzania and Rwanda and has already hired senior managers. Equity is also bent on going it alone in the Mortgage business after Housing Finance seemed to have rejected its advances of a merger. The bank has already advertised for the position of Head of Mortgaging Department. The advent of Agency Banking mid-to-late last year will also considerably reduce overheads. The 'physical' expansion of banks will slow down, and with it a reduction in costs of setting up branches. Equity is seen as the bank set to benefit the most from Agency Banking.
KCB on the other hand is present in all EAC countries. It has the highest number of branches and ATM's in the region by far. Though its subsidiaries are clearly holding down The Bank. They made a combined loss of Kshs. 1.8 billion in 2010, shaving off a considerable 0.6 in Earnings Per Share (E.P.S). Sothern Sudan though turned in around half a billion in profits.
KCB though (through its wholly owned subsidiary S&L) is the leader in the mortgage segment that is considered to be the missing link at Equity. It is said to control 29%, just pipping Housing Finance (H.F) which garners 27%. You can see why James was so keen on gaining control of H.F, which was best exemplified by his declaration that "...we are not in H.F for the dividends". Fresh from a highly successful rights issue, KCB is expected to benefit the most from the Construction and Real Estate boom in the region in general, and in particular Kenya. It now has the ability to lend vast amounts of money to a single project. Its culture of bad loans is also fading, with government interference now not an issue. The government waived its rights and its stake in KCB was thus reduced. KCB is also set to trim its executive suite that has seen the hiring of global consultancy firm Mckinsey. This will streamline operations in the business and establish a clear chain of command, which is currently lacking.
Return on Assets: KCB - 3.17%
EQUITY - 5.27%
Return on Equity: KCB: 20.35%
EQUITY: 27.95%
Stock Performance 2010: KCB: +6.1%
EQUITY: +86.41%
Dividend Yield: KCB: 5.43%
EQUITY: 3.2%
VERDICT: Though KCB has been underperforming in comparison to its size, things are looking up for the future. Past performance is by no means a reflection of future performance. Equity is by all means overvalued by the market, trading at a higher P.E than KCB. It needs to get into Rwanda and Tanzania quick. KCB seems to have a lot of room for growth in future, as its subsidiaries break even and they cut their costs. They are expected to benefit from the injection of the rights money. A good performance of a business will always reflect on the stock in the long term. Thus KCB at the moment is a better buy than Equity for the long-term
No counters at the Nairobi bourse will generate as much excitement as banks. Fresh from posting Full Year 2010 super-duper profits, they are massively undervalued.
I will focus on 2 banking giants in our local scene:
In the green corner, weighing in at Kshs. 251 billion in Group Assets is Kenya Commercial Bank.
While in the Red Corner, weighing in at 'only' Kshs.143 billion in Group Assets is Equity Bank.
KCB has for long been known for its inefficiencies and high staff costs. In the past, it has not been able to leverage on its huge asset size to give its shareholders the kind of returns they should be bringing home. Shareholders for the past couple of years have seen their wealth more or less stagnant (not regarding dividends which are pretty good) as other counters in the NSE have created multi-millionaires as a result of massive capital gains.
One of these counters is Equity Bank. Guided by James Mwangi, the bank has been able to grow by leaps and bounds to take it to within the top 3 banks in the country based on Profit After Tax (PAT). It uses a model based on high volume transactions. No wonder it is the bank with the highest number of customers. Its rapid rise in the past few years since being listed by introduction has no doubt created wealth for many shareholders. Indeed, Equity is valued higher in terms of market capitalisation than KCB (92.5B VS 67.8B) It is 3rd overall in market cap, behind Safaricom and EABL. Such is the confidence that the market has on Equity that it traditionally trades at a higher Price To Earnings Ration (P.E) than its peers. In the run-up to the 2011 full year results, Equity was testing a trailing P.E of 27. This has now cooled down to a not so modest 21.93. KCB is trading at a trailing P.E of 8.51. All these as at Monday 28th 2011.
But some have come to the fore arguing that Equity is currently at the optimal growth level. That there is no more room for the hyper-growth it has been experiencing in the last 5 years. It's key market Kenya, seems to be saturated. There are 44 banks in the country and though there is still a relatively high number of unbanked in the country, such a high number of banks means that Equity may not be able to continue to post such a high margin of growth locally.
This is why the bank has been on a major expansion drive. Other than its home market of Kenya, the bank is present in Uganda and Southern Sudan (S.S). The Ugandan unit has yet to break even. But the S.S unit is now very profitable. Equity is the bank that has the most number of customers in S.S though KCB has much more branches. It has plans on going into Tanzania and Rwanda and has already hired senior managers. Equity is also bent on going it alone in the Mortgage business after Housing Finance seemed to have rejected its advances of a merger. The bank has already advertised for the position of Head of Mortgaging Department. The advent of Agency Banking mid-to-late last year will also considerably reduce overheads. The 'physical' expansion of banks will slow down, and with it a reduction in costs of setting up branches. Equity is seen as the bank set to benefit the most from Agency Banking.
KCB on the other hand is present in all EAC countries. It has the highest number of branches and ATM's in the region by far. Though its subsidiaries are clearly holding down The Bank. They made a combined loss of Kshs. 1.8 billion in 2010, shaving off a considerable 0.6 in Earnings Per Share (E.P.S). Sothern Sudan though turned in around half a billion in profits.
KCB though (through its wholly owned subsidiary S&L) is the leader in the mortgage segment that is considered to be the missing link at Equity. It is said to control 29%, just pipping Housing Finance (H.F) which garners 27%. You can see why James was so keen on gaining control of H.F, which was best exemplified by his declaration that "...we are not in H.F for the dividends". Fresh from a highly successful rights issue, KCB is expected to benefit the most from the Construction and Real Estate boom in the region in general, and in particular Kenya. It now has the ability to lend vast amounts of money to a single project. Its culture of bad loans is also fading, with government interference now not an issue. The government waived its rights and its stake in KCB was thus reduced. KCB is also set to trim its executive suite that has seen the hiring of global consultancy firm Mckinsey. This will streamline operations in the business and establish a clear chain of command, which is currently lacking.
Return on Assets: KCB - 3.17%
EQUITY - 5.27%
Return on Equity: KCB: 20.35%
EQUITY: 27.95%
Stock Performance 2010: KCB: +6.1%
EQUITY: +86.41%
Dividend Yield: KCB: 5.43%
EQUITY: 3.2%
VERDICT: Though KCB has been underperforming in comparison to its size, things are looking up for the future. Past performance is by no means a reflection of future performance. Equity is by all means overvalued by the market, trading at a higher P.E than KCB. It needs to get into Rwanda and Tanzania quick. KCB seems to have a lot of room for growth in future, as its subsidiaries break even and they cut their costs. They are expected to benefit from the injection of the rights money. A good performance of a business will always reflect on the stock in the long term. Thus KCB at the moment is a better buy than Equity for the long-term
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