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Market Report – 23rd October 2020


Faida Research - October 23, 2020 - 0 comments

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Market Commentary:

The All Share Index gained by 1.1% w-o-w to close the week at 141.21. We attribute this mainly to Safaricom (trading on the counter accounted for 54.7% of the week’s traded value) gaining by 3.0% w-o-w to KES 30.95 on increased foreign investor demand. However, the NSE 20 Share Index retreated by 0.7% w-o-w to close at 1,799.29 as majority of the constituent counters recorded price declines. Market turnover declined marginally by 0.1% to KES 1.3 billion while the number of shares traded declined by 18.1% to KES 42.8 million. The banking sector accounted for 30.6% of the week’s traded value with Co-op (-3.4% to KES 11.40), Equity (-1.7% to KES 34.35), KCB (-0.4% to KES 37.05) recording notable price movements and activity. In coming week, we expect activity on Safaricom to remain high ahead of its 1H2020/21 results announcement. Investors may be speculating on the company delivering relatively better(compared to earlier expectations) financial performance given the recent news on Fuliza (may partially offset lower revenues from P2P transfers) and better economic performance in the second half of the year.

News Highlights:

Co-operative Bank Hires McKinsey to Help Improve Lending Processes

  • Co-operative Bank has hired McKinsey & Company to focus on credit risk management by reviewing its lending processes, with an aim to reduce the risk of loan defaults in the COVID-19 environment.
  • According to management, the bank may need to change its lending template, loan profiles and job descriptions at the branches and at the head office to remain competitive going forward.
  • The bank stated that it currently only has 1.0% exposure in tourism, restaurants and hotels -which has lowered the default risk during the pandemic – given these sectors have been hardest hit.
  • According to McKinsey, banks have been relying on pre-pandemic risk management models which draw on historical data and these need adjusting.
  • McKinsey had previously been hired by the bank in 2014 to cut costs and transform it into a digital bank.
  • We note that the banking sector had restructured KES 1.2 trillion loans (38.0% of the banking sector loan book) by August 2020 with Co-operative bank restructuring loans worth KES 39.2 billion in 1H2020 (14.4% of the loan book).

 

Commentary

  • We note that the bank’s loan book segmentation reduces its exposure to the sectors largely impacted by the pandemic. As at 1H2020, personal lending book (largely public sector servants who are viewed more job secure) was at 42.1% of the total loan book.
  • Asset quality however remains of concern with the NPL ratio growing to 10.5% in 1H2020 from 10.0% in 1H2019 on account of the tough economic environment.
  • We therefore see the focus on credit risk management as a prudent move that will benefit the bank post-COVID-19 and ultimately improve investor sentiment on the bank.

 

Recommendation:

LONG-TERM BUY – Equity

SELL – HF

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