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Kenya: Faida Investment Bank Recommendation: Kenya Commercial Bank
Friday, 03 October 2008
Ratio Magazine is showcasing banking sector research from Faida Investment Bank (FIB). In this follow up piece to the overview of the banking sector, FIB’s Head of Research, David Mataen, assesses Kenya Commercial Bank (KCB) as an investment proposition.

Kenya Commercial Bank (KCB)

Business Review
  • In November 2007, KCB established KCB Uganda Ltd, its subsidiary in Uganda, in keeping with   strategic plans to grow its regional footprint.
  • The bank opened a total of 12 new branches in 2007: 10 in Kenya, one in Tanzania and one in Uganda.
  • To make its business more competitive, it launched two new products in the year: KCB Biashara Banking, which targets small to medium businesses with deposits and loan products; and KCB Advantage Banking tailored to their clientele of medium and high net worth individuals.
  • The group initiated a couple of business partnerships to push loan and mortgage products through big business customers’ labour pools.
  • It expanded its ATM network by linking it to a stand alone cross-sector ATM network, Pesa Point, which has over 250 service outlets across the country.
  • An independent survey conducted by Steadman Group in 2007 found that the KCB brand is the fourth most recognizable in the country. To further enhance brand visibility, the group continues its flagship sponsorships like the KCB Kenya National Rally Championship, the KCB Safari Rally, the KCB Pro-Am Golf Tour, and the KCB/Kenya National Cross Country Championships.

Outlook
  • Network expansion plans are expected to continue, with 50 new branches due in 2008/2009.
  • Alternative delivery channels enhancement is also on course with 55 additional ATMs expected to be on stream in the same period.
  • Implementation of a new core banking IT platform is on progress and scheduled for commissioning in the last quarter of 2008. This new platform is expected to boost the functionality of the ATM network so that customers can fulfill more tasks on these terminals, in a bid to ease congestion in the banking halls, and cap personnel costs.
  • The dividend of regional expansion should start flowing in this year. Sudan is already contributing to profits, Uganda’s deposit mobilisation is up to a good early start, and the bank will be entering the Rwandan market by November 2008.

Summary of the Investment Value Proposition
  • The banking sector continues to have a good run as hitherto unbanked sections of the economy become drawn into the formal cash economy. In addition, trade within the region and with international partners continues to increase.
  • Opportunities for fee-based models are opening up and expanding, including IPO financing; foreign exchange trading; inter-network remittances; increased POS services.
  • Automation is helping rationalize operating costs in the sector, making it possible to access and enjoy economies of scale and improved productivity.
  • Having the most expansive, country-wide network gives the bank advantages i.e. participating in capital market transactions as receiving bankers, and in large inter-bank syndications.
  • Having 81% of customer deposits in current accounts affords the bank the luxury to play the interest rates game without hurting net margins.
  • Tapping regional markets for their growth potential and arbitrage between credit markets.
  • As customer numbers increase, fee and commission income increases of necessity out of the multiplier effect of large numbers.
  • The group has recently raised KES5.5bn in new capital through a rights issue. The objective was to finance domestic and regional expansion, and finance channels roll-out i.e. ATMs, POS network.
  • As a result, we do not expect the bank to further utilize internally generated funds to finance expansion. A handsome dividend is to be expected upon the presentation of full year results in March next year.

Recommendation
We estimate six months forward PE at 10.5X and 18 months forward PE at 7.5X. We therefore recommend investment in the stock of this bank as a VERY STRONG BUY.

For more information, contact David Mataen, Head of Research, Faida Investment Bank (FIB), on This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

For David's overview of the banking sector, read Kenya: Faida Investment Bank on Kenya’s Banking Sector: Ready for Take Off

Also read Kenya: Faida Investment Bank Recommendation: Barclays Bank Limited
              Kenya: Faida Investment Bank Recommendation: Equity Bank Limited

Disclaimer: The information contained herein is obtained from sources that to the best of our knowledge are reliable. As such, neither Faida Investment Bank nor Ratio Magazine/Africa Business Insight are responsible or liable for any factual errors arising thereof. Any opinions expressed herein are ours and may change anytime at no notice.
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