Co-operative Bank shares stick out on upside beat
Local banks continue to offer more competitive returns relative to their counterparts in Nigeria as a result of Kenya’s superior banking policy consistency and stability as compared to Nigeria, and especially the recent repeal of rate caps in Kenya.
“Current policy dynamic in Kenya, on balance, remains supportive of real earnings growth in the medium term.
Following the repeal of the interest rate cap, we have increased our target prices by an estimated 27 per cent, on average, across our coverage banks,” says Investec Securities in a report.
Investec rated Co-op Bank share prices with highest upside potential at 14.2 per cent to a projected fair price of Sh7.30 from the current Sh15.15 saying KCB comes second with a 12.9 per cent upside potential from Sh52.00 to Sh58.70 while Equity is projected to rise 3.9 per cent from Sh50.25 to Sh52.20.
The wealth management firm says Co-op Bank is on track to deliver a 12-month local currency return of 22.3 per cent and a dollar return of 16.0 per cent, followed by KCB with a 22.2 per cent local currency return and a dollar return of 15.9 per cent in 12 months, while Equity delivers 10.1 per cent and 5.4 per cent returns in local and foreign currency, respectively.
It further rates the three stocks, with Co-op Bank retaining a buy rating, KCB upgraded from hold to a buy while Equity has been rated a hold.
“We expect KCB’s return on investment to improve from 21 per cent (FY19e) to 25 per cent (FY21e),” read the report in part.
Investec bases its ratings on a stock’s expected total return (ETR) over the next 12 months with total return defined as the expected percentage change in price plus the projected dividend yield.
Ratings are based on the 12 month implied US dollar expected total return.
The review says Co-op Bank delivered stronger growth in non-funded income streams relative to her peers in the banking sector, a trend expected to continue in the medium term.
“We forecast rising Return on Equity (ROE) as existing clients are migrated to cheaper digital and agent channels which should contain cost,” said the Investec report for 2020.