We place a LONG-TERM BUY recommendation on NCBA Group. The counter is currently trading at a P/B ratio of 0.61x (based on a market price of KES 27.72 as at 15th May 2020) lower than the industry average P/B of 0.76x. Given the economic uncertainties brought on by the pandemic, we expect the group’s financial performance to come under pressure in the short-term. Our recommendation is underpinned by the following factors:
Taking into account the current low interest rate environment (low CBR rate) coupled with measures to ease repayment burdens on clients, we anticipate the group’s NIMs to be negatively affected in FY2020. Additionally, owing to the tough economic climate, we expect repayment challenges to affect income derived from NCBA’s M-Shwari in FY2020.
NCBA’s strength in digital lending is however, anticipated to support non-funded income growth in the long-term, after the COVID-19 pandemic. We believe there’s some regulatory risk (in Kenya) that could potentially result in lower fees charged on M-Shwari and Fuliza.
We also have some concerns about the group’s asset quality (NPL ratio, as measured against net loans, stood at 13.5% in FY2019) which we believe will continue to come under pressure in FY2020 as a result of the challenging operating environment brought on by the COVID-19 pandemic.
We are however optimistic that in the long-term the group’s diversified loan book (consisting of corporate, institutional, retail and SME clients) to mitigate against the asset quality issue.
We believe that the success of the merger will be hinged on the adoption of the right strategy that factors in the combined strengths of the two groups (asset finance, digital banking and corporate banking) while working to ameliorate risks (like the NPL issue). The key risk we see in strategy implementation is the merging of corporate cultures which could take some time.