Investors undervalue banks despite increased earnings

Nairobi Securities Exchange trading floor. FILE PHOTO | NMG

A majority of listed banks in Kenya remain undervalued by investors in the stock market relative to their net asset value, despite reporting record profits in a tough economy, which has eroded most companies’ valuations and profitability.

Analysis of lenders’ price-to-book valuations –which indicates the value that market participants attach to a company’s shares relative to its net assets— shows that nine out of 12 have a P/B ratio of less than one, effectively rendering them undervalued by this metric.

The ratio, alongside the price-to-earnings (P/E) ratio, is used by investors to gauge whether stocks are overvalued or undervalued in the stock market. A low ratio suggests that a stock is undervalued.

For listed banks at the Nairobi Securities Exchange (NSE), the P/B ratios as of Tuesday ranged from 0.17 times (HF Group) to 1.15 times (Standard Chartered Bank Kenya), with the majority falling between 0.4 and 0.9 times.

The median P/E ratio for banks stands at 3.8 times, down from 8.4 times five years ago, while the median P/B has fallen to 0.7 from 1.2 in the period.

Consistently higher profits for banks, save for the Covid-19 hit 2020 financial year, have helped bolster the quality of their books, with acquisitions by large lenders both in Kenya and regionally also boosting their asset bases.

In the 2022 financial year, the banking sector made a record Sh244 billion in pre-tax profits, data from the Central Bank of Kenya (CBK) shows.

At the same time, their share price performance over the last year has been mixed, where the two largest lenders by assets and market capitalisation (Equity Group and KCB) have recorded negative movement while others such as Stanchart and NCBA Group have seen double-digit price growth.

Out of the 11 listed lenders, seven have witnessed their share prices appreciate in the last 12 months, while four have recorded a depreciation.

The muted share price growth has been seen despite the lenders being some of the most consistent in the market in the payment of dividends.

Ten of the 11 banks declared a payout for the year ending December 2022, giving their stocks dividend yields of between 5.7 percent and 13 percent, which largely rival the net yields on offer on government securities.

Other large blue chip counters have a higher price-to-book ratio compared to banks, suggesting that their stocks are overvalued by investors.

Safaricom (3.9 times net assets), EABL (4.8 times) and BAT (2.7 times) have share price valuations that are more than two times their book value, while their P/E ratios are also higher at 11.2, 11.3 and 6.5 times respectively.

Safaricom and EABL, plus large lenders (Equity, KCB) dominate trading at the NSE, largely on account of foreign activity on their counters.

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