Monday, 6 August 2007

NSE’s stellar growth attracts Wall Street

Written by James Makau
31-July-2007: Etched firmly in a number of people’s minds, is the humour surrounding the recent experience of one of Wall Street’s big investment banks at the hands of a leading Kenyan brokerage firm.

Attracted by the prospects of lucrative business by partnering with a local firm in a highly publicised initial public offering, the Wall Street outfit’s senior personnel were slightly shocked when their kind hosts offered them plastic garden chairs in their boardroom.

While light debate may rage on as to why one of Wall Street’s finest took an early leave from the meeting opting for another firm, one fact remains starkly clear, the fast paced growth in Kenya’s capital markets is still taking time to sink in; even for market players.

In the last five years, turnover at the Nairobi Stock Exchange has grown phenomenally from Sh2.9 billion in 2002 to Sh95 billion last year while the number of CDSC accounts – prerequisite to trading at the stock exchange – have in the last two years increased from 80,000 in 2005 to an estimated 700,000 investors to date.

This rally has literally spawned millionaires overnight, creating a hunger of stock market investments with the oversubscription of all the initial public offerings in the last year to date, a clear testament to the insatiable investment appetite in the country.

The strong returns posted by Kenyan equities listed at the NSE have not gone unnoticed with international interest in the country’s markets building up in recent years.

But with only 15 active stock exchanges in Sub Saharan Africa, the regions equity markets pale in size to other emerging markets worldwide posting a combined market capitalisation of US$39.2 billion, excluding South Africa, in 2005.

The JSE which is the 16th largest exchange in the world, had a market capitalisation of US$ 566billion, accounting for 94 per cent of Sub—Saharan Africa’s total market cap.
As it is, the JSE’s market cap is 14 times larger than all the other African markets combined.

With limited growth and lack of expansion by firms in Africa, few are able to list in exchange markets thus leading to a shortage of tradable securities in those markets.

Data from the World Bank’s Climate Investment study indicate that business losses due to investment climate constraints such as power outages, transport failures, and logistics delays are largely responsible for shortfalls in productivity of a number of African firms.

This data has suggested that African firms are faced with constraints that prevent them from increasing productivity and expanding their operations.

A long—term strategy for attracting more investment has been the focus towards increasing the supply of available securities In Kenya, lack of enough securities at the NSE has led to liquidity concerns with too many buyers chasing too few shares.

But the introduction of high level Initial Public Offers and automation of the trading system continue to raise the profile of the NSE and spur growth in the Kenyan equity markets.

Representing between 70 and 80 per cent of Kenya’s financial assets, the banking sector is also poised for a growth spurt along with the capital markets.

Kenya’s banking sector’s robust growth in the last four years moving in tandem with the country‘s economic recovery has provided a solid pillar for financial services to thrive.

Available statistics indicate a 43.7 per cent increase in pre-tax profits to Sh27.3 billion at the end of 2006 with total assets in the sector estimated at Sh760.8 billion reflecting an 18.2 per cent growth from 2005.

Reforms by the Central Bank and the modernisation of the financial sector have also played a crucial role in the growth of banking services in the country.
The introduction of the Real Time Gross Settlement has expedited up the settlement of online and cheque payments while tighter supervision of banks has raised the levels of governance in Kenya’s financial institutions.

Long burdened by massive non performing loans, the Kenyan banking sector is well on its way to recovery as the Government owned banks – the main holders of NPLs – improve their balance sheet positions in readiness and write off bad debts.

The Government’s withdrawal from commercial banking has led to the return to profitability of Kenya Commercial Bank — the country’s largest bank in terms of branch network— and plans are under way to restructure National Bank of Kenya which currently has the largest non performing loan in the sector.

In insurance, the Government has tightened regulation of the industry introducing new rules for minimum capital requirements for insurance firms and new rules for minimum capital guarantees by brokers and agents.

Introduction of new mandatory, nationwide health and pension insurance plans will boost demand for these types of insurance, including for supplementary health and pension products provided by the private sector.

The penetration of potential insurance markets in Kenya is expected to grow past the current 3 percent level as the costs of insurance come down and confidence in underwriters picks up.

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