LONG TERM BUY
Equity Group Holdings
We recommend a LONG-TERM BUY on Equity Group Holdings. The counter is currently trading at a trailing P/B of 1.11x (at a price of KES 32.85) compared to the banking sector P/B of 0.73x as at 7th July 2020. It’s also trading at a 31.1% discount to its 3-year average P/B multiple of 1.61x. Our recommendation is based on the company’s i) Superior digital banking capabilities ii) Agile balance sheet- liquidity ratio of 51.6% and core capital/risk weighted asset ratio of 17.5%. iii) Growth in non-funded income. The group remains fundamentally sound hence our recommendation to investors with a long term view.
With the current economic shock due to COVID-19, we expect the bank to leverage on its robust digital capabilities to increase its service offering on digital platforms. We expect to see asset quality deterioration should the COVID-19s economic impact worsen with expected default to hit SMEs the hardest.
We place a LONG-TERM BUY recommendation on NCBA Group. The counter is currently trading at a P/B ratio of 0.59x (based on a market price of KES 26.45 as at 7th July 2020) lower than the industry average P/B of 0.73x.
Given the economic uncertainties brought on by the pandemic, we expect the group’s financial performance to come under pressure in the short-term. Going forward, we expect NCBA group to continue to focus on investing in government & investment securities (lending to the government) as well as lending in the inter-bank market in order to mitigate against the asset quality risks brought on by the COVID-19 pandemic. Consequently, we expect to see low loan book growth in 2H2020. We expect the group’s 5 year strategy to be implemented effectively post-pandemic since, according to management, the group is focusing on surviving the pandemic. We are optimistic about the potential success of the merger.
We assign a LONG-TERM BUY recommendation on Stanbic Holdings. The current market price of KES 79.50 (as at 7th July 2020) presents a buying opportunity for investors with a long-term investment horizon. Stanbic is currently trading at a trailing P/B of 0.64x a discount of 21.0% over its 3-year P/B average of 0.88x. The counter also has a dividend yield of 8.8%, higher than the industry average of 5.2%.
We expect the efficiency enhancing measures adopted by Stanbic before the COVID-19 pandemic to mitigate against the expected lower net interest income, consequently supporting the bottom-line.
We issue a LONG-TERM BUY on KCB Group. The counter is currently trading a trailing P/B multiple of 0.83x (at a price of KES 34.60), a 29.1% discount of over its 3-year P/B average of 1.17x. The company has a return on average equity (ROaE) of 20.7% (second highest among listed banks) and a dividend yield of 10.1% above the industry average of 5.2% (as at 7th July 2020).
We believe the group’s strategic partnerships and investment in digital channels will continue to deliver growth. However, we anticipate lower loan book growth and asset quality deterioration due to the pandemic. In the short term, we expect a higher a cost to income ratio to lead to lower profitability for the bank. Over the long term, we see a strong investment case for a buy and hold investor driven by the aforementioned drivers which will outlive the pandemic.
We recommend a LONG-TERM BUY on ABSA Bank with the counter trading at a P/B multiple of 1.19x (at a price of KES 9.94) against an industry average of 0.73x as at 7th July 2020. The counter has a high ROaE of 16.7%, which is above the industry average of 15.6%. Additionally, the counter has the highest dividend yield at 11.1%, higher than the industry average of 5.2%.
We expect more caution on lending, particularly to the sectors largely affected by the Covid-19 crisis such as the SME sector. This may see reduced lending through the bank’s Wezesha Bishara proposition through which the bank offered unsecured loans to SMEs. We note the bank, as part of its new strategy had gradually started including more risky segments such as SMEs in its lending strategy. We expect resumption once the economy stabilizes.
The banks is fundamentally strong with a high dividend yield and is focused on digitization and operational efficiency. We note that the two years (FY2018 and FY2019) into implementation of the new 5-year strategy the bank has recorded improvements in ROaE, cost to income ratio and non-funded income contribution. We expect with the separation from Barclays PLC that the bank will have more flexibility to produce localized products.
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