Market Commentary:
- The All Share and NSE 20 Indices reversed the previous trading session’s gain, retreating by 0.8% and 0.7% to close the day at 129.7 and 1738.5 respectively. This was on the back of foreign sell-side activity in the banking sector (81.4% of the day’s traded value) as banks began announcing their 1H2020 results.
- The banking sector’s performance is expected to be negatively impacted by the COVID-19 pandemic. As such, investors have taken a pessimistic/negative outlook on the sector.
- KCB emerged among the top losers of the day, declining by 6.1% to KES 30.55 on negative investor sentiment following a 40.4% decline in after tax profits for 1H2020. Other declines in the sector were Equity (-4.3% to KES 28.10), Stanbic (-2.0% to KES 73.50) and NCBA (-1.3% to KES 23.15). Foreigner investors dominated today’s trading activity (65.3 % participation) with 76.8% of the day’s total sales against 54.3% of the day’s total purchase.
News Highlights:
KCB Group Posts a 40.4% y/y Decline in After Tax Profits for 1H2020
KCB Group’s after tax profits declined by 40.4% y/y to KES 7.6 billion in 1H2020 from KES 12.7 billion in 1H2019. The performance reflects a mix of factors notably the effects of the COVID-19 and the consolidation of NBK financial results (1H2019 results do not capture NBK financial results).
The considerable drop in profitability was primarily due to a 263.8% y/y surge in loan loss provisions to KES 11.0 billion (1H2019: KES 3.0 billion). As a result of the higher provisioning, the group’s cost of risk rose to 4.0% from 1.3% over the same period.
Total interest income edged up by 23.2% y/y to KES 41.4 billion. The growth was mainly owing to a 65.0% y/y rise in interest income from government securities to KES 10.8 billion as the group’s holding of government securities edged up by 54.5% y/y (2.9% q/q) to KES 208.5 billion.
Interest income from loans and advances increased by 11.9% y/y to KES 30.0 billion as loans advanced to customers grew by 17.0% y/y (1.1% q/q) to KES 559.9 billion. The annualized yield on loans dipped by 50 bps to 11.0%.
Total interest expenses rose by 25.7% y/y to KES 10.3 billion. This was due to a 28.7% y/y increase in interest expenses from customer deposits to KES 9.3 billion as customer deposits grew by 34.6% y/y (2.4% q/q) to KES 758.2 billion. Cost of customer deposits remained flat at 2.6%.
Net interest income rose by 22.3% y/y to KES 31.1 billion. Net interest margin (NIM) dipped to 7.8% from 8.3% lower due to a faster rise in total interest earning assets (26.5% y/y to KES 821.7 billion).The lower growth in net interest income reflects lower yields on interesting earnings assets while cost of funds remained relatively unchanged.
Non-interest income grew by 6.0% y/y to KES 14.0 billion as fees and commissions on loans and advances increased by 5.6% y/y to KES 4.9 billion and other fees and commissions grew by 5.5% y/y to KES 4.5 billion. We note that in the 2Q2020(3 months to 30th June 2020), non-interest income declined by 23.2% to KES 6.1 billion compared to the 1Q2020(3 months to 31st March 2020). The contribution of non-funded income to total income dropped to 31.0% (1H2020: 34.1%).
Total operating expenses (excluding provisions) rose by 20.3% y/y to KES 21.2 billion. The cost-to-income ratio rose to 47.0% (1H2019: 45.7%).
Gross non-performing loans edged up by 114.5% y/y to KES 83.9 billion with the NPL ratio (gross NPLs/gross loans) growing to 13.7% (1H2019: 7.8%).
Commentary
The financial results capture the effects of the COVID-19 pandemic. In particular, the 2Q2020 (3 months to 30th June 2020) performance was relatively weaker compared to the 1Q2020. This reflected by weaker loan book and customer deposit growth, higher cost of risk and lower non-interest income.
Management will have a briefing on the 17th of August 2020 to provide more details on the financial performance for the period. As such, we have withdrawn our LONG-TERM BUY recommendation on KCB Group. We will issue an update after the management briefing.
Recommendations:
Long Term Buy- Equity, Absa, Stanbic, NCBA
Hold- Safaricom
Sell- Stanchart, Bamburi, HF
