Bank Due Diligence for Kenya Project 2016 Updated, and 2017 Progress Report

Bank Due Diligence for Kenya Project 2016 Updated, and 2017 Progress Report

Introduction

Regulators around the world and Kenya in particular are increasingly recognizing the importance of ensuring that the banks have adequate controls and procedures in place to protect depositors as well as individuals and institutions that want to invest in the banks. The recent commercial bank crisis that has led to three banks - Dubai, Imperial, and Chase Bank - to be put under receivership emphasize the need for investors to perform due diligence when identifying a suitable candidate for investment. Without this, investors can become subject to various risks such as unsystematic risk, interest rate risk, and liquidity risk.
Nonetheless, the banking industry provides a good opportunity for investment based on the experienced growth in 2015 in deposits, assets, profitability, and product offerings. Jubilee Insurance would want to benefit from the potentially high returns in the banking industry; hence, the need for a bank due diligence report. This report is based on significant and material findings of the due diligence review performed on financial statements of 10 listed banks in Kenya.

Methodology

For the purpose of this report, I have placed reliance on the audited financial statements of the banks as at and for the year ended 31st December 2014 and 31st December 2015. The scope of my work included analyses of the financial statements including the statement of financial position, the statement of comprehensive income, and other disclosures of the respective banks to provide information to compute the CAMELS ratios. The CAMELS rating system include capital adequacy, asset quality, earnings, liquidity, and statutory ratios.

Capital adequacy: This examines how much capital a bank should set aside as a proportion of risky assets. The ratios I computed include deposit to total assets, non-performing loans net provisions to shareholders fund, shareholders fund to total deposits, and shareholder equity to total assets.

Asset quality: One of the indicators for asset quality that I used include the ratio of non-performing loans to total loans. The ratios in this case are aimed at indicating the quality of credit decisions made by the bankers.

Earnings: The earnings ratios provide the banks’ ability to create appropriate returns to be able to expand, retain competitiveness, and add capital making them key in rating the continued viability of the banks. The ratios I used in this case include cost to income ratio, return on average capital, and return on assets.

Liquidity: This is intended to check whether the banks are liquid enough to meet depositor’ and creditors’ demands. I have used loans to deposits ratio, loans to total assets, and liquidity ratio provided by the banks to determine their liquidity.

Statutory ratios: The statutory ratios relate to capital, deposit liabilities, and total risk-weighted assets. The ratios provided in the bank financials include capital to total deposit liabilities, core capital to total risk-weighted assets, and total capital to total risk-weighted assets.

The average on each of the above category of ratios is used to rank the banks on a scale of 1 to 5. This provides us with the average ranking based on the average of the averages of the five categories of ratios.
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