Feature of the week:
Co-operative Bank Posts a 3.7% Decline In After Tax Profits for 1Q2021
- Co-operative Bank posted a 3.7% y/y decline in after tax profits to KES 3.5 billion (1Q2020: KES 3.6 billion). The decrease in profitability was mainly due to higher provisioning (+153.5% y/y to KES 2.3 billion).
- Total interest income grew by 27.6% y/y to KES 13.5 billion primarily due to growth in both income from loans and advances and income from government securities. Income from loans and advances edged up by 22.5% y/y to KES 9.3 billion as net loans grew by 8.0% y/y to KES 298.2 billion and the yield on loans rose to 12.6% (1Q2020: 11.1%). Income from government securities rose by 44.1% y/y to KES 4.1 billion as the Groups holding of government securities increased by 42.8% y/y to KES 167.3 billion while the yield grew to 10.0% (1Q2020: 9.7%).
- Total interest expenses increased by 19.8% y/y to KES 3.6 billion owing to a 20.9% y/y growth in customer deposit expenses to KES 3.2 billion -as customer deposits grew by 16.0% y/y to KES 393.8 billion. The cost of funds remained flat at 3.3%. Consequently, net interest income edged up by 30.7% y/y to KES 9.8 billion resulting in a NIM of 8.3% (1Q2020: 7.4%).
- Non-funded income eased by 9.2% y/y to KES 4.5 billion driven by a 37.2% decline in other fees and commissions to KES 2.4 billion. Fees and commissions on loans and advances surged by 115.6% y/y to KES 1.3 billion. The contribution of non-funded income to total operating income dipped to 31.5% from 39.9% in 1Q2020.
- Operating expenses (excluding provisions) grew by 27.4% y/y to KES 9.3 billion driven by a 42.2% y/y increase in other expenses to KES 2.6 billion. The cost-to-income ratio (excluding provisions) declined to 48.6% from 50.9% in 1Q2020.
- Loan loss provisions surged by 153.5% y/y to KES 2.3 billion. Cost of risk edged up to 3.2% (1Q2020: 1.4%). Gross non-performing loans edged up by 63.3% y/y to KES 52.0 billion with up to KES 49.0 billion of the loan book restructured.
- We expect the group’s digital strategy to drive growth going forward, riding on the MCo-op Cash platform, with the key focus being e-credit. We see this supporting i) mobilization of cheap deposits ii) growth of non-funded income iii) boosting credit growth
- With uncertainty around economic recovery, we expect the bank to maintain a cautious lending strategy, with continued increased allocation to government securities. The group’s loan book remains predominantly (48.4%) exposed to personal consumer.
- We remain concerned with the bank’s asset quality and expect the cost of risk to remain elevated driven by exposure to trade and real estate sectors at 12.0% and 9.0% whose sector NPLs are 35.0% and 16.0% respectively.
- Co-op bank is currently trading at a P/B ratio of 0.91x vs industry average of 0.69x.
- The recommendation is under review.
ABSA Kenya Posts a 23.7% y/y Growth in After Tax Profits for 1Q2021
- ABSA Kenya reported a 23.7% y/y growth in after tax profits to KES 2.4 billion (1Q2020: KES 2.0 billion). The performance was characterized by a 5.9% y/y increase in net interest income to KES 6.0 billion, a 1.0% y/y decline in operating expenses (excluding provisions) to KES 4.0 billion and nil separation costs.
- Total interest income eased by 0.3% y/y to KES 7.6 billion mainly on account of an 82.0% y/y decline in income from deposits and placements with banking institutions to KES 12.5 million (1Q2020: KES 69.4 million).
- Income from loans and advances rose by 1.3% y/y to KES 5.5 billion buoyed by a 7.5% y/y growth in the net loans to KES 218.3 billion (1Q2020: KES 203.0 billion) even as the yield on loans and advances fell to 10.4% from 11.0% in 1Q2020.
- Income from government securities declined by 1.8% y/y to KES 2.0 billion as yields on government securities declined from 6.7% in 1Q2020 to 6.5% in 1Q2021. The bank’s holdings of government securities edged up by 1.1% y/y to KES 126.7 billion.
- Total interest expenses declined by 17.7% y/y to KES 1.6 billion predominantly owing to a 58.8% y/y decrease in interest expenses from deposits and placements from banking institutions to KES 1.6 billion.
- Interest expenses from customer deposits dipped by 6.3% y/y to KES 1.4 billion driven by a dip in the cost of deposits to 2.2% from 2.6% in 1Q2020. Customer deposits grew by 7.7% y/y to KES 257.1 billion (1Q2020: KES 238.7 billion).
- Consequently, net interest income edged up by 5.9% y/y to KES 6.0 billion. The net interest margin remained flat at 6.9% (1Q2020: 6.9%) as interest earning assets rose by 5.3% y/y to KES 347.9 billion.
- Non-funded income fell by 3.9% y/y to KES 2.9 billion mainly owing to an 18.4% y/y drop in foreign exchange trading income to KES 933.1 million.
- Fees and commissions on loans and advances grew by 14.7% y/y to KES 448.0 million. Other fees and commission grew by 4.9% y/y to KES 1.2 billion
- The contribution of non-funded income to total income eased to 32.3% (1Q2020: 34.5%).
- Operating expenses (excluding provisions) fell by 1.0% y/y to KES 4.0 billion. This was primarily owing to a 7.6% y/y dip in staff costs to KES 2.3 billion.
- The cost to income ratio (excluding provisions) improved to 45.5% (1Q2020: 47.1%).
- Loan loss provisions grew by 24.9% y/y to KES 1.4 billion (a slower rate compared to 1Q2019, +75.2% y/y to KES 1.1 billion) with gross non-performing loans decreasing by 0.4% y/y to KES 17.3 billion. The NPL ratio (Net NPL/Net Loan book) improved to 0.5% (1Q2020: 2.0%).
- Profit before tax and exceptional items eased by 0.7% y/y to KES 3.4 billion. The bank did not incur further separation expenses in the period (1Q2020: KES 552.1 million).
- We are pleased about:
- The consistent improvement in the bank’s cost-to-income ratio (C/I) ratio from 53.9% in 1Q2019 to the current 45.5%. We opine that continued focus on cost management will support bottom-line growth.
- The focus on cheaper deposits which continues to favor the bank through lower cost of deposits.
- Going forward, we expect the bank to continue leveraging technology, innovation and business diversification.
- The recommendations is under review.
Equities Market Summary:
Nairobi Securities Exchange Performance
The All Share Index (NASI) remained flat while the NSE 20 Share Index eased by 0.2% w/w to close the week at 165.76 and 1,858.87 respectively. The market was characterized by an increase in market turnover (4.2% to KES 3.2 billion) and volume of shares traded (14.9% to 93.2 million shares).
ABSA Kenya recorded a 4.5% w/w price gain to KES 9.20 as the bank posted a 23.7% y/y growth in after tax profits for 1Q2021 to KES 2.4 billion. Co-operative bank registered a 1.6% w/w price dip to KES 12.25 as the Group reported a 3.7% y/y decline in after tax profits to KES 3.5 billion.
Other notable price gains were posted on Britam (3.7% to KES 7.26), Equity (1.3% w/w to KES 41.50) and EABL (1.0% to KES 174.00). Safaricom edged up by 0.3% w/w to close at KES 39.50. In the coming week, we expect continued activity on banking counters as more banks release their first quarter 2021 results.
EABL – Long-term Buy
Equity – Hold
KCB – Neutral