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Market Report – 19th March 2021


Faida Research - March 22, 2021 - 0 comments

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Market Commentary:

  • The All Share Index (NASI) and NSE 20 Share Index edged up by 3.0% and 0.5% w/w to close the week at 166.94 and 1,933.60 respectively. Market turnover however declined by 47.7% to KES 1.7 billion as the number of shares traded declined by 39.8% to 57.7 million shares. Safaricom was the most actively traded counter (45.8% of week’s traded value), gaining 4.0% w/w to close at KES 38.60.
  • The banking sector recorded overall price gains as demand outweighed supply in most counters; (Co-op +7.3% to KES 13.90, Equity +4.1% to KES 41.65, KCB +3.5% to KES 41.35, Stanbic +2.7% to KES 85.25). As mentioned in the previous week, investors are realigning towards sectors (like banking) likely to benefit from the economic recovery. We also note there is speculative activity around dividend declarations. We expect activity in the sector to remain relatively high and price momentum to maintained on some of counters like KCB and Co-op.

 

News Highlights:

Co-operative Bank Posts a 23.2% y/y decline in After Tax Profits for FY2020

  • Co-operative Bank posted a 23.2% y/y decrease in after tax profits for FY2020 to KES 11.0 billion (FY2019: KES 14.3 billion). The dip in profitability was predominantly due to increased loan loss provisions.
  • Total interest income rose by 11.9% y/y to KES 48.8 billion, mainly driven by a 30.5% y/y increase in interest income from government securities to KES 14.8 billion (36.8% y/y increase in exposure to government securities) and a 5.4% y/y growth in interest income from loans and advances to KES 33.5 billion. The loan book grew by 7.5% y/y to KES 286.6 billion (yield on loans easing 30bps y/y to 12.1%)
  • Total interest expenses grew slightly by 1.3% y/y to KES 12.5 billion (FY2019: KES 12.3 billion) mainly due to a 2.6% y/y increase in interest expenses from customer deposits to KES 10.9 billion. Customer deposits rose by 13.8 % y/y to KES 378.6 billion. The cost of customer deposits eased by 20bps to 3.1%.
  • Net interest income increased by 16.1% y/y to KES 36.3 billion. The net interest margin remained flat at 8.4%.
  • Non-interest income (NII) grew by 1.9% y/y to KES 17.5 billion primarily due to 58.8% y/y rise in fees and commission income on loans and advances to KES 5.1 billion. Other fees and commissions dipped by 18.9% y/y to KES 7.8 billion. The ratio of NII to operating income declined by 290bps to 32.5%.
  • Operating expenses (excluding provisions) edged up by 23.9% y/y to KES 31.3 billion mainly due to a 44.8% y/y increase in other expenses to KES 12.6 billion and an 8.5% y/y rise in staff costs to KES 13.4 billion. The C/I ratio (excluding provisions) grew to 58.1% (FY2019: 52.1%).
  • Loan loss provisions surged by 219.5% y/y to KES 8.1 billion as gross non-performing loans grew by 87.0% y/y to KES 59.1 billion, with 17.1% of the loan book (KES 49.0 billion) restructured due to Covid-19. Consequently, the NPL ratio (Net NPL/Net Loan book) grew to 10.3% (FY2019: 5.7%).
  • The Group declared a dividend of KES 1.00 per share.

 

Commentary:

  • Given the macroeconomic challenges brought by the pandemic (measures to contain the spread), the poor performance is hardly surprising.
  • Going forward, we expect the bank to continue leveraging on its digital platforms (particularly M-Co-op Cash) boost lending (short term lending) and drive transaction volumes. This should boost non-interest income.
  • Our recommendation on the counter is under review.

 

KCB Group Posts a 22.1% y/y decline in After Tax Profits

  • KCB Group posted a 22.1% y/y decline in after tax profits for FY2020 to KES 19.6 billion (FY2019: KES 25.2 billion). The dip in profitability was primarily owing to higher loan loss provisions.
  • Total interest income rose by 19.4% y/y to KES 88.8 billion, mainly driven by a 64.8% y/y increase in interest income from government securities to KES 23.2 billion and a 9.8% y/y growth in interest income from loans and advances to KES 64.8 billion. The increase in income from government securities was supported by a 27.9% y/y rise in holdings of government securities to KES 210.8 billion as the yield on government securities rose to 12.4% (FY2019: 9.9%). The growth in interest income from loans and advances was supported by a 10.3% y/y increase in the Group’s loan book(net) to KES 595.3 billion even as the yield on loans declined to 11.4% (FY2019:11.9%)
  • Total interest expenses edged up by 14.2% y/y to KES 20.8 billion (FY2019: KES 18.2 billion) mainly due to a 15.9% y/y rise in interest expenses from customer deposits to KES 18.9 billion. Customer deposits rose by 11.7 % y/y to KES 767.2 billion. The cost of customer deposits eased slightly by 10bps y/y to 2.6%.
  • Net interest income increased by 21.0% y/y to KES 67.9 billion. The net interest margin edged up to 8.5% (FY2019: 8.2%).
  • Non-interest income (NII) rose marginally by 1.0% y/y to KES 28.5 billion weighed down by (i) an 18.2% y/y decline in fees and commission income on loans and advances to KES 7.5 billion which we attribute to a 27.0% y/y decline in mobile lending(to KES 154.0 billion) and (ii) a 3.7% y/y dip in other fees and commissions to KES 10.3 billion on the back of a 22.0% y/y dip in mobile banking revenues to KES 7.7 billion (despite a 27.9% y/y increase in mobile transactions to KES 261.0 million) owing to the fee waivers. Consequently, the ratio of NII to operating income declined by 390bps to 29.5%.
  • Operating expenses ((excluding provisions) edged up by 12.1% y/y to KES 43.2 billion mainly driven up by a 13.3% y/y increase in other expenses to KES 16.1 billion and 5.6% y/y growth in staff costs to KES 20.5 billion. The C/I ratio (excluding provisions) however dropped to 44.8% (FY2019: 45.7%). This was owing to the faster rise in operating income (+14.3% y/y to KES 96.4 billion).
  • Loan loss provisions surged by 209.5% y/y to KES 27.5 billion owing to a 52.4% increase in gross non-performing loans to KES 96.6 billion. Consequently, the NPL ratio grew to 14.7% (FY2019: 10.9%) while the cost of risks rose to 4.6% (FY2019: 1.8%). According to management, non-performing loans were driven by the tourism, restaurant and hotels and manufacturing sectors. During the period the group restructured loans worth KES 106.1 billion representing 17.8% of the group net loan book (year-end group loan book).
  • The Group declared a first and final dividend of KES 1.00 per share subject to shareholder approval.

Commentary:

  • The group’s performance was better than expected. This was due to higher net interest margin (8.5%) than expected (7.9%).
  • However, the group’s asset quality, particularly on the corporate loan book (18.6% in FY2020 vs 8.6% in FY2019), remains for concern us.
  • Management will have a call on Monday 22nd to provide more details on the performance and the outlook. We’ll issue our recommendation shortly thereafter.

 

Recommendations:

Kenya Re – HOLD

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