We issue a NEUTRAL recommendation on KCB group with a target price of KES 44.459* representing an upside potential of 6.2% from the current market price of KES 42.00 (4/16/2021). The counter is currently trading a trailing P/B multiple of 0.94x (using price of KES 42.00).
Our key investment considerations include:
Loan book growth and steady deposit mobilization: We expect the loan book (gross loans) and customer deposits to grow at a 5 year CAGR (2021-2025) of 9.1% and 8.8% to KES 1.0 trillion and 1.2 trillion respectively. We have assumed more cautious lending on asset quality concerns in the forecast period hence the lower loan book growth rate compared to the last 5 years (CAGR of 13.4% to KES 658.0 billion).
Higher net interest margin (NIM): We expect the NIM to rise by 50bps to 9.0% in our explicit forecast period (2021-2025) driven by higher loan yields (58bps over the forecast period to 12.0% in 2025) and stable cost of funds (average: 2.6%). The yield uplift on loans is mainly due to higher rates on “new” loans(compared to loans still pegged on interest rate cap regime) after interest rate capping repeal and gradual maturing of loans still pegged on the interest capping regime(CBR + 4.0%). We have not factored yield uplift from implementation of a risk based pricing model which is yet to receive approval from the CBK.
Lower cost of risk: We expect cost of risk to decline to 3.0% (higher than management guidance of 1.8% due to new containment measures) in 2021 from 4.4% in 2020 mainly on better economic growth prospects which should increase repayments. We also expect some provision write backs on performing loans (stage 1 and 2) and increase in recovery efforts on non-performing loans.
Lower growth in non-interest income: We have factored slightly lower growth in non- interest income due to (i) more cautious lending on its mobile platforms (ii) Regulatory pressure to lower the cost of transactions. We expect the proportion of non-interest income to total operating income to average at 30.0%.
Volatile economic environment: With a spike in cases and slower rollout of the vaccines, the government could implement more stringent measures to contain the spread. These measures will likely negatively impact businesses. This could see asset quality deteriorate further, lower credit growth and fewer transactions in the economy (could affect non-interest income).
*Does not take into account the pending acquisitions in Rwanda and Tanzania