Picture: 123RF/TEXBR Nairobi — The removal of a cap on Kenyan bank loan interest rates should help the sector spur gains of as much as 15% for the country’s stocks in the first half of 2019, according to local analysts.
The November repeal of a law imposing a ceiling of four percentage points above the benchmark rate will allow banks to “price loans based on the credit risk of borrowers and thus benefit from higher net interest margins”, said Nairobi-based Cytonn Investments Management CEO Edwin Dande.
The move has already boosted Kenyan stocks, with the Nairobi benchmark index posting a late-2019 rally that helped cement the market as Africa’s best-performing of the past decade. Even after the gains, there is scope for further upside as valuations based on price-to-estimated earnings are still almost 11% short of their record highs, according to Cytonn COO Shiv Arora.
Banks and Safaricom, Kenya’s biggest company by market value, dominate share trading in Nairobi, with Cytonn estimating they account for 75% of all stock transactions. EFG Hermes Kenya expects that lenders will remain key to investors in 2020, after the relief on interest rates.
“The repeal of rate caps will reduce regulatory risks for the banks, and we expect that the banking sector will continue to show leadership in 2020 after several years in which Safaricom dominated,” EFG Hermes Kenya said in its 2020 Year Book. It named Equity Group Holdings and KCB Group (both banks) and East African Breweries as its top stock picks for the year.
The end of the interest rate cap, along with prospects for monetary easing in Kenya, could prompt more local institutional investors to put their money back into the equities market, said Vinita Kotedia, an EFG Hermes Kenya analyst.