Kenya’s 2023 banking sector outlook

Kenya's banking sector has experienced a surge in profitability margins during the first half of 2023, surpassing all expectations. The question now arises - will this momentum be sustained in the second half of the year? Ronny Chokaa, a Research Analyst at Genghis Capital, sheds light on the factors contributing to this success and the outlook for the banking sector moving forward. Despite global uncertainties impacting the banking industry, Ronny emphasizes that the current performance is not merely seasonal but a result of strategic adaptations by banks in the face of challenges. One of the key themes driving this exceptional performance is the agility and innovation displayed by banks. While non-financial corporates have struggled with lower earnings, banks have managed to navigate the headwinds and maintain profitability. The introduction of a risk-based credit pricing methodology earlier in the year has boosted interest income from loans, while rising yields on government securities have enhanced reinvestment income. Global market trends, such as soaring interest rates, have also influenced the cost of funds for banks, prompting adjustments in deposit rates to attract and retain customers. The Central Bank's recent policy interventions have helped stabilize the cost of funds, providing some relief for the banking sector. Despite these positive developments, non-performing loans remain a concern. Economic challenges have led to a rise in the quarterly non-performing loan rate, reflecting the difficulties faced by businesses in servicing their debts. Ronny acknowledges the impact of inflation and exogenous factors on the economy but believes that prudent monetary policy decisions can mitigate these challenges. Looking ahead to the Monetary Policy Committee meeting on October 3rd, expectations are mixed regarding the outcome. While inflation has shown a slight decline, currency pressures and balance of payments concerns may influence the committee's decision towards tightening interest rates. In the Nairobi Securities Exchange, fluctuations in equity turnovers have been observed, contrasting with the strong performance in the bond market. Banks are actively managing their bond portfolios, reflecting a strategic shift towards high-performing assets. Despite varying market conditions, Ronny remains optimistic about certain bank stocks, highlighting Equity Bank and NCBA Bank for their robust earnings momentum and dividend yield. Recommendations for investors include positive outlooks for Cooperative Bank of Kenya, NCBA Bank, Standard Chartered, Stanbic, and APSA, while caution is advised for KCB Group and Diamond Trust Bank due to their comparatively weaker earnings momentum. With a comprehensive overview of the banking sector's performance and investment prospects, Ronny Chokaa's insights provide valuable guidance for stakeholders in the Kenyan financial market.