KCB Posts an 8.5% y/y growth in After Tax Profits for 1Q2020
KCB Group posted an 8.5% y/y growth in after tax profits for 1Q2020 to KES 6.3 billion (1Q2019: KES 5.8 billion). The growth in profitability was predominantly attributed to a 22.4% y/y growth in total operating income to KES 23.0 billion. The performance also reflects consolidation of NBK first quarter results.
Total interest income rose by 20.4% y/y to KES 20.2 billion. This growth was mainly driven by a 63.3% y/y increase in income from government securities to KES 5.3 billion (+20.3% q/q), due to a 52.8% y/y growth in the Group’s holding of government securities to KES 203.7 billion.
Interest income from loans and advances grew by 9.5% y/y to KES 14.7 billion as loans and advances edged up by 19.3% y/y to KES 553.9 billion (+3.5% q/q) with the yield on loans falling to 10.8% (1Q2019: 11.6%).
Total interest expenses declined by 26.6% y/y to KES 5.2 billion owing to a 31.0% y/y dip in interest expenses from customer deposits to KES 4.7 billion. The lower interest expenses from customer deposits were owing to a marginal decrease in the cost of customer deposits to 2.7% (1Q2019: 2.8%) as customer deposits rose by 31.4% y/y to KES 740.4 billion (+7.8% q/q).
Despite an 18.5% y/y growth in net interest income to KES 15.1 billion, the net interest margin (NIM) fell to 7.6% from (1Q2019: 8.5%).
Non-funded income grew by 30.5% y/y to KES 7.9 billion mainly due to a 44.8% y/y rise in other fees and commission income to KES 2.7 billion. The contribution of non-funded income to total income grew to 34.4% (1Q2019:32.3%). According to management, the growth in non-funded income was supported by additional income from National Bank.
Despite a 22.3% y/y increase in operating expenses (excluding provisions) to KES 11.1 billion, the cost to-income ratio (excluding provisions) remained flat at 48.5% owing to the faster rise in total operating income (+22.4% y/y to KES 23.0 billion).
Loan loss provisions surged by 149.1% y/y to KES 2.9 billion as gross nonperforming loans edged up by 70.5% y/y to KES 66.2 billion. According to the bank this was to cover for downgraded facilities, with an expected growth in defaults across key sectors of the economy attributable to the Covid-19 pandemic that has negatively affected the country’s, regional and global economy.
Cost of risk increased by to 2.1% from 1.0% in 1Q2019 owing to the rise in loan loss provisions. Asset quality deteriorated as the NPL ratio (gross NPL/ gross loan book) rose to 11.1% (1Q2019: 7.7%). This was attributed to consolidation with National Bank. We expect asset quality to be adversely impacted by the Covid-19 pandemic due to loan defaulting.
National Bank of Kenya (NBK) posted a profit before tax of KES 233.0 million from loss of 961.0 million in the 1Q2019. Its loan book grew by 3.1% y/y to KES 47.3 billion over the same period.
The 1Q2020 results do not fully capture the effects of the COVID-19 pandemic. The bank announced that it had restructured (mostly in form of payment moratoriums) about KES 80.0 billion in loans (15.0% of the net loans as at end of 2019). Such actions may lower the interest income on loans. The extent ultimately depends on the amount and length of the moratoriums (both affect the cashflows and therefore the gross carrying value of the loans on which the interest rate is applied).
Additionally, there is higher default risk with adverse economic environment which may lead to more impairments. This will also affect the interest income from such loans.
We also note that the lower CBR (currently at 7.0%) will negatively impact interest income on loans pegged on the CBR +4.0% interest rate regime.
It’ll be interesting to see whether the bank will continue to lend (comes at a higher cost of risk) or will adopt a conservative approach (investing in government securities). We do expect some level caution (therefore lower loan growth) even if the bank decides to lend to the private sector.
With lower loan origination, we also expect a negative impact on non-interest income. Fees related to legacy loans (non-digital loans) account for about 60.0% of the total fees on loans and advances. We also note that the restructurings are done at the bank’s cost. Furthermore, with free bank transfers, we expect lower transaction related fees. For instance, KCB guided that it stands to lose about KES 500.0 million from free bank to M-PESA transfers if such measures are extended to the entire year.
Overall, we expect a higher cost to income ratio for the bank and lower profitability in 2020.
Long Term Buy- Equity, Absa, Stanbic
Sell- Stanchart, Bamburi, KQ