So far, weve scoped out bank stocks in Nigeria and Ghana. analyzing their profitability, growth, risk, and value to separate the bargains from the bunk.

Now its time to turn to Kenya, East Africas largest economy. Ten banks call the Nairobi Securities Exchange home. All of them possess different strengths and weaknesses.

Lets put them through our ranking exercise to help determine which ones merit a more detailed analysis.

1. Profitability

If youre in the market for a bank stock, chances are youd prefer one that actually makes money.

Return on Assets (ROA) measures how effectively management deploys the assets under its control. Ive calculated ROA as after-tax profits from continuing operations divided by average assets. Then, because bank earnings can be inconsistent, I averaged the ROA from the most recent five fiscal years.

To calculate a score, I divided the range between the most profitable bank and the least profitable one into deciles. The banks with ROAs in the highest decile were awarded 10 points. Those in the lowest decile scored just one point.

Heres how they stacked up:

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Profitability is great, but Africas best banks are constantly growing their assets. Theyre tapping new market segments, expanding into new territory, or acquiring smaller competitors. And because the banking industry is particularly conducive to building economies of scale, a larger asset base generally translates into greater profitability.

To measure which banks are growing the fastest, I simply annualized the growth of each banks total assets over the most recent five fiscal years.

Heres what I found:

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3. Asset Quality

A banks challenge is to lend as much money as possible for the best return possible. In their zeal to do so, some banks end up lending valuable assets to some rather uncreditworthy customers. When these customers default, the loans must be written down to zero a bad thing for profitability AND growth.

One of my favorite ways to measure a banks asset quality is to determine how much of the loan portfolio isnt performing as planned. I do this by dividing non-performing loans by total loans. A lower ratio implies a lower degree of risk in the banks loan book.

Look here to see which banks are Kenyas most conservative lenders:

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Investing, of course, is all about value. The most profitable, fastest growing, well-managed bank in Kenya can end up losing you money if the price you pay for it is too dear.

When evaluating bank stocks, I take a close look at price/book ratios. Book value is simply the difference between a banks assets and its liabilities. Stocks with low price/book ratios generally have less downside risk. The lower a price/book ratio gets, the less risk there is of the bank disappointing the market and the greater potential there is for it to outperform expectations.

I prefer the price/book ratio over the price/earnings ratio for bank stocks. Why? Because bank earnings can be erratic. Thus, the P/E ratio for a bank coming off a particularly good or bad year will be skewed. Assets, on the other hand, are much less volatile and relatively easy for an accountant to value.

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5. Dividend Yield

Dividend yield is a function of both profitability and value. Generous dividends also suggest a confident management team. Dividend cuts typically wreak havoc on a stocks share price. Therefore, most banks wont raise dividends beyond a level they believe they can sustain.

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Ranking the Banks

Now lets put all the scores together and count them down from worst to first.

10. National Bank of Kenya Oh my. This 44-year-old bank doesnt appear to be aging well. Its put together a decent ROA of 1.96% over the past five years, but that is the only highlight. A small dividend, anemic asset growth, and high relative price put it at the bottom of the chart. If anyone knows of any redeeming qualities for NBK, please post them in the comments.

9. Co-operative Bank of Kenya Co-operative Bank occupies one of the most distinctive buildings in the Nairobi skyline, but it failed to make much of an impression in the showdown. Its been profitable, but its shares are relatively expensive at 2.3x book value.

8. NIC Bank NIC Bank sports one of the lowest price/book ratios of this bunch at 1.24. But its also miserly with its dividend. The shares yield a sector-worst 1.59%. This may reflect the banks intention to add more branches to its network at home and elsewhere in the region. Its re-investing profits in expansion instead of returning them to shareholders. Potential investors should note the banks intention to raise additional capital from the market later this year.

7. Barclays Bank of Kenya BBKs eceptional profitability and generous dividend will prove tempting to many investors, but its growth rate is the slowest of the sector. Factor in a relatively large bad loan book, and this blue chip fails to break into top tier status.

6. Housing Finance Company   This mortgage lender trades at just 74% of its book value, and it offers a substantial dividend, but its profitability pales next to that of its peers, and its non-performing loan ratio is one of the sectors highest. Still, speculators may want to consider the companys recent announcement that it will construct 162 new housing units in eastern Nairobi, funded partially out of its own reserves. This could be a very profitable investment considering the capital citys shortage of affordable housing.

5. CFC Stanbic   It doesnt seem to be making great use of its asset base, and it pays only a token dividend, but CFC Stanbic is one of Kenyas more conservative lenders, and its available at an attractive 0.56 price/book ratio. Perhaps worth a closer look given its plans to expand into Southern Sudan. Investors should note however that the bank is preparing for a rights issue.

4. Diamond Trust Bank An impressively solid loan portfolio coupled with surprisingly rapid growth would put DTB near the top of the rankings if it werent for its ho-hum dividend yield. The bank is conserving its capital to fund additional expansion. It also plans to raise more money from the market. DTB has already developed an impressive regional footprint, which includes Tanzania, Uganda, and Burundi.

3. Kenya Commercial Bank KCB takes more risks in its lending than DTB, as demonstrated by its 6.15% NPL ratio, but it also currently offers one of the juiciest dividends on the Nairobi Securities Exchange. This is in spite of an ambitious regional expansion drive which shows no signs of letting up. Its apparently on the lookout for an acquisition in Uganda .

2. Standard Chartered Bank of Kenya   SCB hasnt been one of this groups fastest growers, but it compensates for this with a conservative loan book and generous dividend. Its not cheap at 2.3x book value, but youre paying for quality here. And regional expansion is in the cards. Management is exploring the possibility of a rights issue to help fund new operations in South Sudan and Rwanda.

And the Winner Is .

1. Equity Bank   Perhaps unsurprisingly, the hands down winner is Equity Bank. Incredibly rapid growth paired with excellent profitability make this an incredibly attractive bank. Foreign investors have already discovered it and now own roughly 43% of outstanding shares. Ive considered buying some many times over the years, but always thought it looked a tad expensive. Its proven me wrong again and again. It may soon be easier than ever to own a piece of this dynamic operation. The CEO remarked recently that the bank may soon cross-list in London, New York, or South Africa .

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What Do You Think?

Does Equity Bank deserve to be head and shoulders above the rest of the field? Which bank stock do you think is the best bargain? Let me know your thoughts in the comments!

[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]