By Vera Shawiza

Cytonn Investments released its Q3’2020

Banking Sector Report, which ranks I&M

Holdings as the most attractive bank in Kenya,

supported by a strong franchise value and

intrinsic value score.

The franchise score measures the broad and

comprehensive business strength of a bank

across 13 different metrics, while the intrinsic

score measures the investment return potential.

The report, themed “Erosion of the Banking

Sector’s Asset Quality amid the COVID-19

Operating Environment,” analysed the Q3’2020

results of the listed banks.

“Asset quality for listed banks deteriorated in

Q3’2020 with the Gross NPL ratio rising by 2.6%

points to 12.4% from 9.8% in Q3’2019. This was

high compared to the 5-year average of 8.5%.

The deterioration in asset quality was due to

the coronavirus-induced downturn in the

economy, which led to an uptick in the non-

performing loans. Consequently, the NPL

coverage rose to 59.2% in Q3’2020 from 57.8%

recorded in Q3’2019, in accordance with IFRS 9,

where banks are expected to provide both for

the incurred and expected credit losses.

We expect higher provisional requirements to

subdue profitability during the year across the

banking sector on account of the tough

business environment”, said David Gitau,

Investment Analyst at Cytonn Investments. Five

key drivers shaped the Banking sector in

Q3’2020, namely Regulation, Monetary Policy,

Consolidation, Asset Quality, and Capital


“On the regulatory front, on March 27th 2020,

the Central Bank of Kenya provided commercial

banks and mortgage finance companies with

guidelines on loan reclassification, and

provisioning of extended and restructured loans

as per the Banking Circular No 3 of 2020.

The loan restructuring involved placing

moratoriums on both interest and principal

payments between three to twelve months, in

effect giving reprieve to borrowers who found it

difficult to repay their loans due to the impact

caused by the pandemic.

Following this guidance, the banking sector has

seen a total of Kshs 1.1 tn, representing 38.6%

of the total Kshs 2.9 tn banking sector loan

book, being restructured as at August 2020,

according to data from the September 2020

Monetary Policy Committee (MPC) Meeting”,

said Ann Wacera, Analyst at Cytonn


I&M Holdings took the top position in the

weighted score of both franchise and future

growth opportunity perspective having a better

capacity to generate profits from its core

business, KCB Group recorded a decline in the

franchise value ranking, coming in 7th mainly

on the back of the deterioration of their asset

quality as evidenced by the group’s high Non-

Performing Loans (NPL) ratio of 15.3% against

a weighted average of 12.4%, and, HF came in

10th position on the back of weak franchise

rankings scores as well as a non-promising

future growth opportunity perspective as a

result of lack of proper cost efficiency structure

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