Market Report – 20th November 2020

Market Commentary:

• The All Share and NSE20 Indices declined by 0.1% and 0.2% w-o-w to 143.72 and 1,785.88 respectively. Market turnover gained by 5.2% w-o-w to KES 2.2 billion while the volume traded declined by 13.3% to 71.5 million shares.
• Activity in the market was dominated by the banking sector (36.7% of the week’s traded value) and Safaricom (45.4% of the week’s traded value; +0.6% w-o-w to KES 32.00). Other notable price movements in the week were Equity (-3.9% w-o-w to KES 35.35), KCB (-3.5% w-o-w to KES 36.20). We expect selling pressure to persist in the coming weeks.

News Highlights:

ABSA Kenya Posts a 65.4% y/y Decline in After Tax Profits for 3Q2020

• ABSA Kenya’s after tax profits for 3Q2020 declined by 65.4% y/y to KES 1.9 billion from KES 5.6 billion reported in 3Q2019. The dip in profitability was primarily owing to a 146.7% y/y surge in loan loss provisions to KES 7.7 billion (3Q2019: KES 3.1 billion).
• Total interest income grew by 1.4% y/y to KES 23.2 billion, primarily driven by a 9.6% y/y increase in income from government securities to KES 6.7 billion.
• Total interest expenses rose by 0.8% y/y to KES 6.1 billion mainly due to a 25.6% y/y increase in interest expenses from deposits and placements from banking institutions to KES 1.2 billion.
• Net interest income grew by 1.6% y/y to KES 17.1 billion. However, the net interest margin (NIM) fell by 100 bps to 6.8% owing to a faster rise in interest earning assets (+11.3% y/y to KES 349.0 billion).
• Non-interest income grew by 4.5% y/y to KES 8.3 billion owing to an 18.8% y/y rise in foreign exchange trading income to KES 3.2 billion. Fees and commissions on loans and advances declined by 9.8% y/y to KES 1.0 billion while transactional income (other fees and commissions) declined by 11.0% to KES 3.2 billion. The contribution of non-interest income to total income improved by 60bps to 32.7% (3Q2019: 32.1%).
• Operating expenses excluding provisions dropped marginally by 1.1% y/y to KES 12.5 billion (3Q2019: KES 12.6 billion). As a result, the cost to-income ratio (excluding provisions) improved to 49.1% from 50.9% in 3Q2019.
• Loan loss provisions surged by 146.7% y/y to KES 7.6 billion as gross nonperforming loans rose by 127.8% y/y to KES 97.0 billion. Consequently, asset quality deteriorated with the NPL ratio (Net NPL/ net loan book) growing to 2.8% (3Q2019: 1.5%).
• Exceptional items grew by 113.6% y/y to KES 1.9 billion. We opine this is related to rebranding costs from the transition to ABSA Kenya from Barclays.

Commentary:

• We opine that the significant increase in provisioning by 146.7% y/y to KES 7.6 billion is a prudent measure adopted by the bank in light of the higher default risk arising from the current business environment.
• We note that the surge in provisioning in 1H2020 (+228.1% y/y to KES 5.4 billion) had been attributed to higher credit risk due to the Covid-19 pandemic. More provisions were made on the performing loans (provisions worth KES 3.0 billion) than on the non-performing loans. The provisions had been primarily on stages 1 and 2 loan and therefore had not translated into an increase in non-performing loans (stage 3) at the time.
• There is a risk that these loans could migrate to the non-performing category if the stringent COVID-19 containment measures.
• We are optimistic about the continued improvement in C/I having declined to 49.1% from 50.9% in 3Q2019 (previously improved to 48.6% in 1H2020 from 51.5% in 1H2019). We shall issue our recommendation in the coming days.

Results for Re-opened FXD2/2013/15 and FXD1/2018/20 Treasury Bonds

• The Central Bank of Kenya (CBK), acting in its capacity as fiscal agent for the Republic of Kenya, invited bids for re-opened FXD2/2013/15 and FXD1/2018/20 with the intention of raising KES 40.0 billion for budgetary support.
• The auction results for the bonds is as shown in the table below:

Source: CBK

• We note that the results are in line with our expectations (13.20% for the FXD1/2018/20 and 12.0% for the FXD2/2013/15).
• We note further that the amount accepted was KES 53.7 billion, higher than the KES 40.0 billion offered, indicating the government’s need for cash.
• With the government borrowing appetite increasing and preference for issuing longer dated bonds, we expect investors to bid aggressively on the longer dated bonds, pushing up the yields on the long end of the yield curve.

Recommendation:

SELL – HF