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Market Report – 27th August 2021


Faida Research - August 31, 2021 - 0 comments

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Feature of the week:

ABSA Kenya Posts an 846.0% y/y Growth in After Tax Profits for 1H2021

ABSA Kenya after tax profits grew significantly to KES 5.6 billion (1H2020: KES 0.6 billion), driven by a sharp decline in loan loss provisions, growth in net interest income and elimination of one-off costs

Total interest income eased marginally (0.8% y/y) to KES 15.2 billion, owing to a 5.1% y/y decrease in interest income from government securities to KES 4.1 billion as the holdings of government securities fell by 9.4% y/y to KES 121.3 billion. The yield on government securities declined to 6.6% from 8.0% in 1H2020.

The dip in interest income from government securities offset a 1.3% y/y growth in interest income from loans and advances. Net loans and advances to customers rose by 8.4% y/y to KES 218.9 billion while the yields on loans declined to 9.5% from 10.3% in 1H2020 as the bank passed on the benefit of the lower Central Bank Rate (CBR) to customers.

Total interest expenses declined by 20.4% y/y to KES 3.2 billion driven by a 74.7% y/y drop in interest expenses from deposits and placements from banking institutions. Interest expenses on customer deposits fell by 7.4% y/y to KES 2.9 billion. As a result, cost of funds improved to 2.4% from 2.7% in 1H2020. Customer deposits grew by 6.1% y/y to KES 263.9 billion.

NIMs increased by 20bps to 7.0% as interest earning assets grew at a slower rate (+1.8% y/y to KES 345.3 billion) than net interest income (+6.1% y/y to KES 17.8 billion).

Non-funded income (NFI) rose by 6.1% y/y to KES 5.9 billion driven by:

  • 1% y/y growth in fees and commissions on loans and advances to KES 877.6 million
  • 6% y/y rise in other fees and commissions to KES 2.2 billion

NFI’s contribution to total income remained flat at 32.8% owing to the growth in net interest income.

Operating expenses (excluding provisions) improved by 2.6% y/y to KES 8.0 billion supported by a 12.0% y/y decline in staff costs to KES 4.4 billion as the bank reduced headcount by over 30.0%. The cost to income ratio (excluding provisions) improved to 44.6% (1Q2020: 48.6%).

Loan loss provisions declined by 63.9% y/y to KES 1.9 billion. As at 1H2021, 94.0% of the restructured KES 62.0 billion loan book (worth KES 59.0 billion) had regularized with all retail borrowers no longer on payment holidays. We note that the bank had previously provisioned for performing loans (worth KES 2.6 billion). In our view, this was a prudent move. The NPL ratio (Gross NPL/Gross Loan book) remained flat at 7.7%.

Commentary

  • The bank continues to make strides under the 5-year Growth, Transformation and Returns strategy (2018-2023):
    • The bank has consistently improved its cost-to-income ratio (C/I) ratio from 55.3% in 1H2019 to the current 44.6% in 1H2021, focusing on customer adoption of alternative channels. As at 1H2021 87.0% of the customer transactions were outside the branch, with anticipated investments in digital infrastructure (KES 1.6 billion for 2021); having so far grown the Timiza mobile banking users to 5.0 million and recently launched Whatsapp banking. We expect this to result in efficiency gains in the short to medium term, with a gradual decline in the C/I ratio.
    • We note positively the consistent decline in cost of funds from 3.0% in 1H2019 to 2.4% in 1H2021. The bank’s focus on mobilizing cheaper deposits (retail) should continue to support this.
    • Non-funded income grew in 1H2021 (from a decline in 1Q2021). We expect the bank’s revenue diversification strategy (through business lines such as bancassurance, Timiza mobile banking, SME banking, forex income and asset management) to result in NFI growth.
  • With expected improvement in macro-economic factors, we expect continued growth in the loanbook, albeit cautiously. We opine that a risk-based pricing model would enhance this growth.
  • Asset quality pressures are expected to decline and we opine that NPLs will remain in the single-digit range for FY2021.
  • We recommend a long-term buy on Absa. The counter is trading at a P/B of 1.28x against a peer comparable P/B of 0.79x. The ROE improved to 22.0% from 6.0% in 1H2020 and we expect it to be sustained.

Equities Market Summary:

Nairobi Securities Exchange Performance

The All Share Index (NASI) and the NSE 20 edged up by 0.5% w/w and 0.9% w/w to close the week at 187.20 and 2,034.30 respectively. Market turnover eased by 48.5% to KES 2.4 billion and number of shares traded fell by 20.1% to 71.5 million shares.

Investor focus was mainly on banking stocks this week with the announcement of 1H2021 results. Most banking counters were up, with the only decline registered on NCBA (-2.4% w/w to KES 26.45). Notable price increases included; Absa (8.4% w/w to KES 11.00), Standard Chartered (3.9% w/w to KES 140.00), Equity (3.3% w/w to KES 54.25), KCB (1.3% w/w to KES 48.55) and Stanbic (1.1% w/w to KES 95.00).

Absa and Standard Chartered released their results during the week. Absa’s profitability surged by 846.0% y/y to KES 5.6 billion. Read more on this in today’s report. Standard Chartered’s profitability grew by 50.9% y/y to KES 4.9 billion.

Safaricom eased by 0.2% w/w to KES 44.35.

In the coming week, we expect activity to remain skewed towards the banking sector as the remaining banks release their 1H2021 results.

 

*We are currently updating our recommendations

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