We retain our NEUTRAL recommendation on KCB group with a revised target price of KES 47.54 (previous target price: KES 44.59) representing an upside potential of 5.4% from the current market price of KES 45.10 (15/10/2021). The counter is currently trading a trailing P/B multiple of 1.10x (using price of KES 45.10 and IH2021 book value).
What Changed in the new estimates?
Lower cost of risk: We have reduced the cost of risk over the five year forecast period from an average of 2.5% (2021: 3.0%) to an average of 2.0% (2021: 2.0%) on account of increased recoveries and improving macroeconomic environment(a big factor in the expected credit model).
Higher Net Interest Margin (NIM): We expect our NIM forecast to gradually rise to 9.3% in 2025(previous estimate: 9.0%). Our five year
forecast average NIM is expected to increase to 9.0% from our previous forecast average of 8.8%. The increase in NIM is mainly due to lower cost of funds (from average of 2.6% to an average of 2.4%) as the bank continues to leverage on alternative channels to grow cheaper deposits.
We retain the yield uplift on loans at 58bps over the forecast period. Just like in the previous estimates, we have not factored yield uplift from implementation of a risk based pricing model which is yet to receive approval from the CBK.
In 2021, compared to our previous estimates, we also expect:
Slower organic deposit mobilization: Our previous estimates factored a higher deposit market share of 18.5% and thus a higher deposit growth rate of 11.0% y/y to KES 851.6 billion (management guidance: 12.0% y/y). However, deposit mobilization in the first two quarters has been slower than anticipated. Management attributed this to tighter liquidity conditions in the period. Although management remains optimistic that it may make up for the slower deposit mobilization in the second half of the year, we take a more cautious direction and factor a lower deposit market share of 17.6% and a lower customer deposit growth rate of 6.1% y/y (to KES 814.0 billion). We have also retained the lower deposit market share in the forecast period. This negatively impacts gross loan growth and non-interest income estimates (transactional income and fees and commissions on lending).
Summary of the changes to the Estimates*
|Gross Loans CAGR (2021 – 2025)||8.9%||9.1%|
|Customer Deposit CAGR (2021 – 2025)||8.6%||8.8%|
|Cost of Funds||2.4%||2.6%|
|Cost of risk||2.0%||2.5%|
|Non-Interest Income CAGR (2021 – 2025)||10.3%||11.3%|
|Total Non-interest income to Total Operating Income Ratio||29.4%||29.9%|
*Excludes impact of acquisitions made during the period
Overall, we remain positive on the bank’s prospects. This is mainly due to the improving macroeconomic environment. We note that the government has stepped efforts to increase COVID-19 vaccination rates. This will lower the likelihood of the government imposing more stringent containment measures leading to minimal disruptions in business activities. With this, we expect relatively higher credit growth and improvement in loan book quality.
The higher inflationary environment remains a cause of concern.
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