NCBA, Absa topple KCB in banks valuation race at NSE

NCBA Group and Absa Bank Kenya have overtaken KCB in market valuation at the Nairobi Securities Exchange (NSE) on the back of the latter’s share price fall to an 11-and-a-half-year low.

KCB’s share price decline to Sh20.05, as of close of trading Wednesday, put its market capitalisation at Sh64.43 billion, making it the fifth most valuable bank at the NSE, behind Equity Group (Sh139.6 billion), Co-operative Bank (Sh68.06 billion), NCBA (Sh65.24 billion) and Absa (Sh65.18 billion).

KCB, which is Kenya’s largest lender by assets, was until three weeks ago the second most valuable listed bank behind Equity Group, before being overtaken first by Co-op Bank and now NCBA and Absa. At the start of the year, KCB’s market value was ahead of Co-op Bank by Sh52.2 billion.

In the year-to-date, the lender’s share price has fallen 48.7 percent, making it the third worst-performing stock behind TransCentury’s negative 52.3 percent and Unga Group’s 51.8 percent.

The negative investor sentiment on the KCB stock, according to analysts, has been mainly driven by the bank’s half-year financials which showed a surge in provisions for loan defaults and lower earnings.

It reported a 20 percent net profit drop in the six months to June to Sh15.5 billion, while provisions for non-performing loans jumped 2.4 times to Sh10.2 billion. This rise in provisions caused a 60 percent jump in operating expenses to Sh50.61 billion.

The lender said net profit was impacted by the aggressive provisioning of loans in KCB Kenya and inherited legal claims in its subsidiary National Bank of Kenya (NBK), as well as staff restructuring costs incurred in the two units to right-size the group.

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“Investors are reacting to the high non-performing loans and also the capital buffers, which are thinner when compared with peer banks in the industry,” said Stacy Makau, analyst at AIB AXYS Africa, an investment bank.

“The financial performance was largely to do with the subsidiary NBK, otherwise KCB’s Kenyan and regional subsidiaries performed well.”

KCB Group managed to improve its NPL ratio to 17.4 percent compared with the 21.5 percent it had reported in the half year ended June 2022, attributed to recovery efforts led by a special committee put in place to address the defaults.

The sharp fall in share price shows that investors have yet to be fully convinced by the efforts to repair the books.

Analysts reckon, however, that there is an overreaction to the bank’s spike in provisions, partly with an eye on the potential effect on the lender’s dividend payout in a market where capital gains have thinned.

“Considering that what they are taking a hit on presently are legacy issues which go as far back as 25 years, the heavy discounting based on NPLs is somewhat irrational,” said Wesley Manambo, an analyst at Standard Investment Bank.

Before the recent decline, KCB’s stock has been one of the most stable in the market alongside other blue chips such as Safaricom, Equity, EABL and BAT Kenya, due to regular dividend payments and being traded by foreign investors.

The extended foreign exits from the market this year have however hit the performance of these stocks, contributing to their share price falls by between seven and 49 percent in the year-to-date.

Overall, all the listed banks remain undervalued by historical standards, with the lenders having previously traded at multiples of their net assets before the onset of the NSE’s present bear run that has slashed investor wealth by Sh529.4 billion since the beginning of 2023.

Currently, price-to-book valuations –which indicates the value that market participants attach to a company’s shares relative to its net assets— show that nine out of the 11 listed banks have a P/B ratio of less than one, effectively rendering them undervalued by this metric.

Out of these listed lenders, six have witnessed their share prices fall since the beginning of the year, while five have recorded an appreciation.

KCB and Equity, which have a large float of liquid shares and exposure to foreign trades have recorded the biggest decline in the period at -48.7 percent and -18.7 percent respectively.

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Co-op Bank, NCBA, Absa, Stanbic Holdings and Standard Chartered Bank Kenya, which have large local and foreign institutional shareholders, have seen more muted share price movements ranging from StanChart’s gain of 3.2 percent to Co-op’s decline of 5.7 percent this year.

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