Why this is the right time to buy bank stocks
We maintain that bank stocks are undervalued, a chance that presents a good opportunity to buy.
Banks have a lower stock price-to-book ratio. According to EFG Hermes, despite the strong earnings outlook, Kenya banks’ average 2023 price-to-book ratio of 0.7x and price-to-equity of 3.4x, are significantly below its 2008-21 average of 1.6x and 14.2x, respectively.
The banking sector has maintained strong performance and we project earnings growth in FY 2022 for the upcoming financial results. The net profits of the banking sector reported in third quarter (Q3) 2022 grew compared to Q3 2021.
Profits for FY 2022 are expected to grow further after banks reported impressive results in Q3. Banks are expected to return profits on stronger loan growth, fees, and commissions from trading forex as well as cost-cutting measures by migrating operations onto digital platforms.
With Price-to-Book Ratio currently at a historic low, this is the best time to buy bank stocks. Equity Bank is our top pick. The net profits of Equity grew by 28 percent to Kes34.4 billion for the nine months ended 30th September 2022.
This was the highest profit growth compared to other banks making the Equity stock more attractive to investors. Equity’s regional expansion saw subsidiaries contribute 43 percent of the group’s revenues and 32 percent of the group’s profits.
The proportion of gross non-performing loans to gross loans and advances is low meaning Equity has a quality loan portfolio. Equity Group has good governance led by Dr James Mwangi therefore higher earnings and strong performance.
Diamond Trust Bank
We think there is a big gap between Diamond Trust Bank’s (DTB) net book value per share and current stock price.
The Nairobi Securities Exchange (NSE) banking counters are trading at multiple lows for a number of reasons including capital flow from emerging markets, and cash flow pressures. Our view is that with DTB investors might be indicating declined earnings.
The earnings of DTB dropped by 39.34 percent from Kes7.27 billion in 2019 to Kes4.41 billion in 2021. DTB issued 24 million new shares in 2016 and a further 14 million shares in the following year.
The new shares significantly diluted stock price and it went down. And with declined earnings, investors are not willing to pay for the current stock price.