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Market Report – 20th August 2021


Faida Research - August 24, 2021 - 0 comments

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Feature of the week:

KCB Group Posts a 101.9% y/y Increase in After Tax Profits for 1H2021

KCB Group’s after tax profits increased by 101.9% y/y to KES 15.3 billion in 1H2021 from KES 7.6 billion in 1H2020. The higher profitability was buoyed by higher interest income, lower loan loss provisions and lower effective taxation.

Total interest income rose by 13.9% y/y to KES 47.1 billion. The growth was mainly owing to a 15.0% y/y rise in interest income from net loans and advances as loans advanced to customers grew by 8.4% y/y to KES 607.0 billion. Gross loans edged up by 10.0% y/y to KES 670.0 billion driven by personal and manufacturing sectors. The annualized yield on loans grew by 50 bps to 11.5%.

Interest income from government securities grew by 11.6% y/y to KES 12.1 billion as the group’s holding of government securities edged up by 2.2% y/y to KES 213.0 billion. The yield on government securities was relatively flat at 11.5%.

Total interest expenses rose by 3.8% y/y to KES 10.7 billion. This was driven by a 54.7% y/y growth in interest expenses from deposits and placement from banks to KES 1.5 billion. Interest expenses from deposits fell by 1.7% y/y to KES 9.2 billion as cost of funds dropped to 2.6% from 2.7% in 1H2020. Customer deposits grew by 3.7% y/y to KES 786.0 billion.

Net interest income rose by 17.2% y/y to KES 36.4 billion.

Net interest margin (NIM) grew by 10 bps to 7.9% due to a faster rise in net interest income (+17.2% y/y to KES 36.4 billion) than in total interest earning assets (6.2% y/y to KES 872.6 billion).

Non-interest income grew by 5.9% y/y to KES 14.8 billion as other income grew by 35.3% y/y to KES 2.9 billion and other fees and commissions income rose by 16.2% y/y to KES 5.2 billion. Fees and commissions on loans and advances decreased by 18.9% y/y to KES 4.0 billion which management attributed to deliberate actions to reduce mobile lending(particularly on KCB MPESA and Vooma) in order to mitigate against higher NPLs.

Total operating expenses (excluding provisions) rose by 7.2% y/y to KES 22.7 billion due to higher staff costs (+21.4% y/y to KES 12.3 billion) which offset the decline (-12.7% y/y to KES 29.3 billion) in “other expenses”. The cost-to-income ratio (excluding provisions) however dipped to 44.3% (1H2020: 47.0%) owing to the faster rise in operating income (+13.7% y/y to KES 51.2 billion).

Loan loss provisions eased by 40.3% y/y to KES 6.6 billion as the COVID-19 related impairments had been recognized in FY2020 and the facilities restructured. Management also intimated that 89.3% of the loans that had been restructured were performing as normal. Cost of risk improved to 2.2% from 4.0% in 1H2020 driven by reduced impairment charge on corporate and digital lending facilities largely from KCB Kenya.

Gross non-performing loans edged up by 14.1% y/y to KES 95.7 billion. The NPL ratio (gross NPLs/gross loans) rose to 14.3% (1H2020: 13.1%). The highest NPL ratio was recorded in the corporate segment (17.9% up from 12.0% in the 1H2020. The mortgage segment registered an increase in NPL ratio to 10.5% from 10.3%. The SME & micro and check off segments registered an improvement in NPL ratio to 11.8 %( 1H2020: 14.9%) and 2.8 %( 1H2020: 2.9%) respectively.

The group’s effective tax rate decline to 30.2% from 40.9% in the 1H2020.

Commentary

In our KCB Group 1Q2021 results note, we highlighted some concerns in the group’s performance for that period namely (i) the weak non-funded income particularly from fees and commissions from loans and advances (ii) the rise in NPLs particularly in the corporate loan book.

Although the performance for this period is weaker in these two areas compared to the 1H2020, we do see some positive developments compared to the previous quarter:

  • Improvement in NPL Ratio: Group NPL declined to 14.1% from 14.8% in the 1Q2021. Most of the segments registered an improvement with the exception of the mortgage segment (rose from 9.6% in the 1Q2021 to 10.5% in the 2Q2021). In particular, the corporate loan book’s NPL ratio declined to 17.9% from 19.3%.
  • Higher mobile lending: Value of mobile loans increased by 7% q/q.

The question is whether these trends can be sustained.

Management generally expects better economic prospects in the second half of the year. We will be seeking more information from management

(management will have a call on 23rd August 2021) on how they intend to capitalize on the better economic prospects to further improve performance. We will issue our recommendation thereafter.

Equities Market Summary:

Nairobi Securities Exchange Performance

 

The All Share Index (NASI) and the NSE 20 edged up by 2.8% w/w and 2.8% w/w to close the week at 186.30 and 2,015.77 respectively. Market turnover edged up by 86.0% to KES 4.6 billion and number of shares traded fell by 12.8% to 88.5 million shares. We attribute the gains on the indices partly due to gains on banking stocks and Safaricom.

Safaricom rose by 3.4% w/w to KES 44.45.

Most of the banking counters recorded price gains on the back of increased demand ahead of the 1H2021 results. Equity Group (+2.9% w/w to KES 52.50), KCB group (+1.7% w/w to KES 47.95) and Co-operative (Co-op) bank (-0.7% w/w to KES 13.70) all announced their 1H2021 results in the week.

Equity Group’s after tax profits grew by 94.5% y/y to KES 17.6 billion while KCB Group’s after profits grew by 101.9% y/y to KES 15.3 billion (read more on KCB’s performance in the “In the News” segment). There was increased supply on KCB Group after the announcement. We opine that this is partly due the group not declaring an interim dividend for the period. Coop bank after tax profits by 2.3% y/y rise in after tax profit to KES 7.4 billion for 1H2021, the slowest among the three banks.

There were notable price gains on other banking stocks; Stanbic (9.3% w/w to KES 94.00), HF (7.0% w/w to KES 3.98), NCBA (6.7% w/w to KES 27.10), Absa (3.8% w/w to KES 10.15), Standard Chartered (3.1% w/w to KES 134.75) and I&M (1.1% w/w to KES 23.00).

In the coming week, we could see more sell side activity on some of these counters that had rallied as investors look to book the gains.

 

*We are currently updating our recommendations

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