Market Commentary:
- The All Share Index and NSE 20 Share Index gained marginally by 0.5% and 0.3% to close the day at 138.26 and 1,936.17 respectively. We partly attribute these to gains made on Safaricom (1.2%) and EABL (0.9%). Safaricom’s price gain was on the back of increased foreign investor demand as investors took advantage of last week’s price decline (2.3% w/w). On the other hand, the banking sector continued on its downward trend for the day: Equity (-0.9%), NCBA (-0.9%), KCB (-1.1%) and HF (-4.7%).
News Highlights:
I&M Holdings Plc Posts a 29.7% Y/Y Decline in After Tax Profits to KES 1.6 Billion
I&M recorded a 29.7% y/y decline in after tax profits to KES 1.6 billion.
This was attributed to:
o 178.4% increase in loan loss provisions to KES 555.2 million. However, gross non-performing loans declined by 9.5% y/y to KES 9.1 billion and as a result the Net NPL ratio (Net NPL/Net Loans) declined from 5.9% in 1Q2019 to 5.0% 1Q2020.
o Total expenses (excluding provisions) grew by 10.7% y/y to KES2.4 billion as depreciation increase by 39.1% y/y to KES 209.9 million, amortization increased by 33.8% y/y to KES 114.8 million and other expenses by 20.5% y/y to KES 844.2 million. This saw the cost to income ratio (excluding provisions) increase to 43.1% (1Q2019: 41.2%).
Total interest income grew by 5.7% y/y driven by a 7.2% y/y growth in interest in loans and advances as loans and advances to customers grew by 8.3% y/y to KES 182.8 billion. The annualized yield on loans declined by 10 bps y/y to 11.6%.
Total interest expenses went up by 7.1% y/y to KES 2.9 billion driven by growth in interest in customer deposits (+8.0% y/y to KES 2.6 billion). This was driven by an 8.8% y/y growth in customer deposits to KES 240.7 billion. Annualized cost of funds declined by 10bps y/y to 4.5%.
Net interest margin (NIMs) declined by 20bps y/y to 5.0%.
Non-funded income (NFI) grew by 7.4% y/y to KES 2.2 billion driven by a 20.9% increase in fees and commissions on loans and advances to KES 470.4 million and a 19.5% y/y increase in other income to KES 510.9 million. Non funded income to total income stood at 38.8% in 1Q2020 compared to 38.2% in 1Q2019
Commentary
We remain concerned with the group’s deteriorating asset quality. Prior to COVID19, the group was still grappling with an NPL ratio above the industry average due to exposure to manufacturing and trade sectors. We expect further pressure for 2Q2020 due to the economic impact of the pandemic.
We are optimistic about the bank’s ability to consistently grow its NFI income the past 5 years from 27.0% in FY2014 to 38.8% as 1Q2020. As other banks face challenges with fees and commissions due to waiving fees on digital platforms, we believe I&M will gradually grow its non-funded income leveraging on non-credit related income from I&M Burbidge Capital and Youjays insurance.
As I&M is predominantly a corporate and institutional bank (60% of clients), we don’t expect to see significant decline in lending (compared to SME focused banks). However, we expect cautious lending towards the trading and manufacturing sector.
We are currently reviewing the recommendation.
Recommendations:
Long Term Buy- KCB, Equity, Absa, Stanbic, NCBA
Hold- Safaricom
Sell- Stanchart, Bamburi, HF