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Business
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Written by Jeff Mbanga
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Wednesday, 25 November 2009 19:42 |
Dfcu has emerged the best buy for those looking to purchase shares in any of the three local banks listed on the Uganda Securities Exchange, according to the latest research by one of the country’s top investment advisory firms, African Alliance. The same firm considers Bank of Baroda a risky equity.
The research, which offers a cautious outlook on the general state of banks this calendar year, and the next, also shows how stiff competition and the growing pressure from the Central Bank has pushed down interest rates on loans, thereby hurting the banks’ earnings.
The African Alliance research, while purely the company’s opinion, is a good indicator so far of how banks are likely to perform this year. The research was done by the company’s lead analyst, Grace Semakula, under the watch of Oliver Hoffmann.
The study also offers a general insight into how banks are shifting from their conventional methods of making money, and seeking new avenues.
However, it is African Alliance’s strong forecast for dfcu Bank that market analysts will be keen not to ignore. A continued target for investors, dfcu has restructured its business in a way that has helped it shake off public skepticism to becoming a model for other banks.
“Our preferred choice amongst the listed Ugandan banks is dfcu. We expect dfcu’s earnings to outperform Stanbic and BoBU (Bank of Baroda) on the back of strong non-interest income growth (+35%) and further bad debt recovery…” notes the research.
African Alliance also offers dfcu a thumbs-up on its aggressive branch expansion plan, with the bank pledging to raise its current branch network from 24 to 43 by the year 2013.
Dfcu is also planning to introduce one of the most efficient banking platforms, Finnacle, within the first three months of 2010. With Finnacle, dfcu will have a wider scope of information about its services. This is bound to instill discipline in the way it structures its products, thereby minimising risk.
“With the adoption of Finacle, we estimate dfcu’s cost-to-income ratio to decline to 50.5% in FY13 (vs. 57.5% in FY08), as a result of increased automation and a significant reduction in the percentage of back-office staff,” notes the African Alliance research.
For dfcu, the research is recognition of the success it has achieved when it decided to integrate its development finance branches with the bank, forming a single entity three years ago. The move sought to slash the company’s high operation costs to become more efficient as a one-stop centre of financial services.
While it recognises Stanbic Bank’s huge size as a factor behind its strong purchasing power, African Alliance advises shareholders to ‘hold’ their shares. An assessment of ‘hold’ is a wait-and-see situation because African Alliance is cautious about Stanbic’s short term prospects, partly due to the heavy competition threatening its market share.
The bank is also said to be facing increased staff costs, which has come with its branch expansion.
Nevertheless, Stanbic’s huge cash flow, part of which was recently reinforced with the issuance of a Shs 30 billion bond, offers the bank a huge opportunity to increase its mortgage loans. Stanbic’s credit towards mortgage accounts for a paltry 6% of its loan portfolio.
It is Bank of Baroda, one of the country’s oldest banks, which gets the short end of African Alliance’s stick. Once a star at the stock market, after its share price shattered records as it climbed towards levels that forced the company to call a share split, Bank of Baroda’s equity is now deemed risky.
African Alliance assesses Bank of Baroda’s share as a ‘sell’, a departure from the bank’s appraisal of about three years. “We believe BoBU (Bank of Baroda) will be the laggard: it is expected to lose market share due to its small branch strength (8 in FY08), lack of a well-defined growth strategy and generally conservative lending policies,” notes the research.
African Alliance also doubts whether the company can meet its targets as set out in its strategic paper Vision 2013. “We remain sceptical about BoBU’s ability to achieve its loan growth targets as laid out in the Vision 2013 document primarily due to its low visibility in Uganda.”
On Uganda’s commercial banking sector as a whole, the research predicts changing tides in the Central Bank’s policies, and the way the banks will make money. According to the research, Bank of Uganda is likely to increase the capital requirement of banks from Shs 4 billion to levels that can match its East African counterparts.
Kenya’s capital market requirement is six times higher than Uganda’s, at Shs 26.8 billion, while Tanzania’s is twice, at Shs 10.3 billion.
The research also points out that with interest rates on loans coming under immense pressure, banks have discovered new and better avenues to make money in non-interest ventures. This is mainly through foreign exchange transactions.
However, African Alliance still believes it will be some time before the banks make as much money as they did only recently.
“Going forward, the banking sector is unlikely to repeat recent historic levels of asset and profit growth.
Firstly, loan and deposit growth has slowed as evidenced in 1H09 results. Secondly, competition for deposits and political pressure on banks to lower their lending rates will likely result in a squeeze in margins over the medium term,” concludes the research.
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