Banks share prices set for correction

Listed commercial banks share prices are set to re-adjust downwards in the near term as the market absorbs shocks emanating from observed investor overexcitement on the repeal of interest rate caps.

This is as the banking counter sees off exits from investors who moved to lock in profits from the anticipated appreciation of dividend yields to shareholders from the upcoming profit declarations by banks in the first quarter of the year.

The repeal of interest rate caps saw an investor drive towards the accumulation of bank shares with the rally saving the Nairobi Security Exchange (NSE) blushes of another barren year as the all share index (NASI) gained by 18.5 percent.

“The market might have moved slightly more than expected to news of the interest caps repeal. What’s holding down the banks stock share prices is the locking in of profits from the anticipation of dividend appreciation,” Genghis Capital Equities Analyst Patrick Mumu said.

Commercial banks are expected to reveal higher earnings for the year closing December 31 2019 beginning in February and the subsequent announcement on dividend pay-outs to shareholders.

Nevertheless, Mumu holds out sector earnings are likely to stay off the expected overdrive with lenders having likely maintained a cautious stance to lending from a combination of factors including elevated non-performing loans, recorded at 12.3 percent in October and upward pressure risks on government yields.

The banking sector stocks are however bound to remain attractive in the longer term in a combination of below average market valuations and greater projections on margins growth in subsequent financial years.

“Once profit taking is concluded, the lower levels in stock prices will induce more trading by investors with a long-term view,” added Mumu.

Equity and KCB guided the investor bias towards banking stocks on the bank end of 2019 as the pair’s respective share prices gained by 53.5 percent and 44.2 percent respectively ahead of other notable gains by Barclays, NCBA and Cooperative Bank.

The group of tier 1 lenders is expected to preserve the counters attractiveness as represented on their buy and hold rating by investment intermediaries.

Listed banks have already demonstrated their potential for growth having registered a stronger deposit and loan book growth in the third quarter of 2019 in comparison to 2018 at 11 and 11.6 percent respectively, implying an ease on cheap deposit mobilization and credit extension according to researchers at Cytonn Investment.

Non-funded income also grew at a faster rate of 15.8 percent year over year boosted by fees and commissions emanating from the greater advancement of credit.