The Effect of Real Estate Finance Portfolio Size on the Stock Performance of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

According to Central Banks of Kenya (CBK) 2010, The Kenyan real estate finance has grown rapidly over recent years in both value of loans and number of loans. The study is set out with the objective of establishing the relationship between the real estate finance portfolio size (Mortgage) and the stock performance (return) of commercial banks listed at the Nairobi Securities Exchange in Kenya. To achieve the objectives of the study, a regression model was developed using the stock performance, measured by return, as the dependent variable and the size of the real estate finance portfolio as the independent variable as well as the return on equity of the banks as the controlling variable. The secondary data was collected from published reports by the Nairobi Securities Exchange (NSE) and the Capital Markets Authority (CMA) and the Central Banks of Kenya (CBK) reports for a period of five years between 2006 and 2010. The researcher adopted a survey research design on a target population of all commercial banks, within the study period, which were 10. The data collected was analyzed using linear regression analysis conducted at 95% confidence level. The study used the regression analysis to establish the relationship between the real estate finance portfolio size and stock return. The results obtained from the regression model shows that a unit increase in real estate finance size will result in 0.000415 increase in stock returns, all factors remaining constant. Therefore to enhance shareholder value, the banks should manage the real estate finance as a product and also use it to improve the banks revenues. The study concludes and recommends that in view of the findings of other studies that the amount of mortgage advanced by the listed commercial banks would lead to a high financial performance and the findings of this study that an increase in mortgage size causes and increase in stock return, then it would be beneficial for both management of banks and investors to properly manage the banks’ mortgage portfolio size, all other factors remaining constant.