Kenya: Faida Investment Bank Recommendation: Barclays Bank Limited Kenya

Monday, 06 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 Barclays Bank Kenya as an investment proposition. Barclays Bank Business Review Branch network almost doubled in 2007 from 62 to 107 branches. This expansion aimed at bringing the bank close to customers by providing them greater convenience in access to products and services. Barclays introduced 95 new ATMs across the country in 2007, bringing the total number to 193. This further enhanced customer convenience. The number of ATMs in non-branch locations i.e. gas filing stations, and malls and supermarkets has grown to 46 from 26 in 2007. The bank has taken sales to another level by recruiting 4,358 direct sales staff to enable it move its products and services to wherever existing or potential customers are. This sales force has been crucial in fuelling the bank’s growth in customer numbers, in deposits and in earning loan assets. The bank expanded its card business by becoming an acquirer for the global brands, necessitating an expansion of points of sale (POS) to 4,490 – by far the biggest network in the country. The bank launched online banking for corporate clients. The asset finance product introduced recently has rode to the top of its class, now boasting KES4bn in assets booked. Custody business has equally grown substantially in the year to gross KES140bn in assets under custody. It earned commended status for foreign investors/cross border and leading clients from Global Custodian Survey 2007. To stabilise assets/liability maturities matches and improving the ability of the bank to fund longer term assets, the bank obtained approval from the Capital Markets Authority (CMA) for a long-term bond of KES5 billlion, in tranches. Two tranches of KES1bn have since been issued, and both were well received by the capital market. This is also expected to be the first in a long-term vision of evolving capability in structured asset products for the bank. Company Operations The bank has joined the race of network expansion and delivery channels enhancements, all for the prize of new, almost free deposits. It was able to add KES14bn new customer deposits or 15% year on year to June 2007, KES11.5bn of this achieved in the first six months of 2007. Notwithstanding the underlying strategy, the bank has not been able to bring down its general cost of funds - in fact, it has increased marginally. We believe this is because of its reactionary approach to deposit mobilisation, arriving at sections of the market long after other players. It is therefore forced to pay slightly higher for deposits to play catch up. The bank has equally been looking to placements from other banks as a source of deposits, having grown it from just under KES1bn in June 2006 to KES6.3bn by June 2007. This had been occasioned by the bank’s ability to arbitrage on credit markets, taking increasingly cheaper placements from other banks and committing to lending while putting most of its own deposits into government securities.   Other asset diversification strategy brought on stream has been mortgages. The mortgage book stands at about KES2bn, and growth has been impeded by the painfully slow processing procedures prevailing in the market. The other main challenge faced by Barclays and all other banks trying to develop mortgage products is supply-side constraints, there being much fewer housing units completed each year at 150,000 and most without mortgage. In terms of the efficiency of its operations, Barclays has maintained a fairly efficient business structure. Automation has enabled growth in volumes of business without a commensurate growth in operating costs. Even after factoring in establishment costs of new branches, it still emerged with an attractive cost/income ratio of 63% well below the sector average of 67%. In view of the current mode of aggressive expansion, the bank’s capital strength is fairly sound. Core capital/total deposits of 13.4% against a minimum statutory ratio of 8% enables the bank sufficient headroom for a sustained growth in the asset base through the funded business. Retained earnings are now scaling KES16bn. One of the strongest selling points for Barclay is its asset quality. Non-performing loans as a percentage of gross loans are only 5.3%, having worsened slightly from 4.9% in December 2007. Outlook Branch expansion efforts and ATM network growth are set to continue into 2009. We expect the bank to invest in a modern core banking platform in this or the coming year as the current legacy system is archaic and unable to support multi-electronic services. The bank should consolidate the gains from its rapid expansion program in 2008/09 by increasing lending and capping cost of funds in the next two years. Fees and commission income should continue to grow as the bank promotes its services to a wider client base, and continues to strengthen its trading business lines. As a consequence of aggressive expansion and lending, we expect bad debts portfolio to bulge, and in keeping with the bank’s policy of accelerated loss crystallization, we expect loan loss charge to grow out of line with most recent experiences. We expect efficiency ratio to worsen marginally to 64% owing to increased bad debt provisioning and further establishment costs as the bank continues to expand branch and channel networks. Summary of the Investment Value Proposition Good growth in loan assets without compromising on quality. The bank has managed to defend margins in a market where they have generally been coming down everywhere by attracting cheaper deposits. Growth in business volumes is expected to continue boosting fees income. Despite huge investments in property and equipment for expansion, the bank’s efficiency levels are still fairly high. Immense capital base that allows for further expansion capacity without undermining the bank’s generous dividend payout policies. The banks return on every shilling committed is by far superior to sector average, equally its return on equity at 28% in 2007. As expansion and establishment costs stabilize, we expect the bank to return to its dividend payout of nearly 100%   Recommendation We estimate six months forward PE at 13.7x and 18 months forward PE at 10.7x. We therefore recommend investment in the stock of this bank as a VERY STRONG BUY The above summary is an abridged version of Faida Investment Bank’s research. For the full document, including data, 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: Kenya Commercial Bank               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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