The current dominance of Bank of Kigali (BK), the country’s most capitalised bank, is likely to stimulate investor appetite for the lender’s shares although increased competition looks set to weigh down on its market share.
BK shares endured serious fluctuation at the Rwandan bourse since the bank’s listing last year. In some instances, the bank’s shares price dipped below the Initial Public Offer (IPO) price of Rwf125.
BK and Bralirwa, the country’s leading beverages company by market share and profit, are the only domestic banks listed on the Rwanda Stock Exchange (RSE).
According to a report compiled by investment bank, Renaissance Capital, BK shares will rebound in the long run on account of the bank’s strategy that is aimed at expanding its market share. BK controls 30 per cent of the country’s banking market in an industry that has nine licensed players.
The report says that BK will do so by safeguarding its market share thus making it difficult for rival banks to encroach on its market share.
It gives a detailed narrative of how BK will maintain its hold on the banking industry in the days to come.
“BK’s strategy entails an aggressive branch expansion programme of establishing a 60 plus branch network by next year .This will enable it have channel capacity to service over 500,000 clients along with other inputs in order to build out a retail product line up to achieve more relevance to the daily lives of Rwandans,” says the report.
Other strategies lined up by BK include consolidation of its leading position in corporate banking through integrated client coverage as well as leveraging on its superior lending capacity.
After the circulation of the report by Renaissance Capital that upwardly revised its ratings for BK, some of the analysts and stock brokers who talked to this writer are now advising their clients that BK shares should be taken as assets worth “buying and holding” on to.
By the time of going to press, BK shares were trading at Rwf125 per share.
Renaissance Capital upgraded BK stock to that of “Buy” from “Hold” and increased its expectations to Rwf180 per share. This rules out any hope of speculation with expectations of reaping benefits in a short run. It also implies that BK shares has an upside potential gain of 44 per cent from current levels of Rwf125.
“This estimation of upside potential is what is prompting stock brokers to term BK shares as sure long term bet,” Shehzad Noordally, the General Manager at CDH Capital Rwanda, an investment and stock broker at Rwanda Stock Exchange (RSE) said.
BK is also expected to build scale and critical mass by using its superior access to whole sale funding and capital markets to complement its deposit funding base and to build a very strong retail presence.
Due to the bank’s dominance, Renaissance Capital advised investors at RSE of BK’s true but hidden valuation of Rwf180 based on various observations and professional opinions.
“The decision to pay out a dividend, which we had not expected to happen in the short to medium term, was a positive surprise. BK continues to go from strength to strength with the bank growing its market share gain, despite the growing level of competition in the Rwandan banking market,” the reports states.
“In our opinion, investors should not be overly concerned by the increasing cost base as these should be seen as temporary while the bank ramps up its franchise and seeks to deploy the IPO capital into high-yielding risk assets.”
Technically, such an expert opinion should be loosely translated to mean that BK should be seen as a rising giant in the context of regional banking dynamics with a growth path that is much longer and that the investing public should not expect short term gains from it.
“BK stock will most likely hit the forecast price or even go beyond that,” Shehzad added.
There has been immense discussion about the impact of foreign banks, especially Kenyan banks such as Kenya Commercial Bank and Equity Bank.
The reports states: “We believe these are both highly credible players who are likely to continue taking market share in Rwanda. However, we believe most of the gains will be at the expense of the other players, especially the middle group in the sector in terms of market share, as was evident last year.”
BK’s penetration strategy can be seen when one considers the fact that it increased its branch footprint from 33 in 2010 to 44 by last year.
The number of point of sale terminals (PoS) rose from 97 to 202 and the bank closed the 2010/2011 fiscal year with 26 Automated Teller Machines (ATMs). This year, the bank intends to open a further 12 branches across the country while raising the number of ATMs to 86 and the PoS terminals to about 1,000. In the medium term, these numbers should rise to 89, 145 and 3,400, respectively, by 2015.
However, while embarking on such an ambitious expansion scheme, Rennaissance Capital believes that these are aggressive targets that are likely to put pressure on BK’s cost base especially its income ratios, which are key performance indicators for top rated banks.
Such an exposure, Renaissance Capital says are occurring from BK rapid expansion outside key cities and major towns.