Market Commentary:
The All Share Index declined by 0.3% w-o-w to close the week at 143.30 mainly attributed to Safaricom declining by 0.3% to KES 31.90 (24.5% of traded value). The NSE20 Index also declined by 1.6% w-o-w to 1.758.05 as majority of its constituent counters recorded price declines. However, market turnover increased by 6.6% to KES 2.2 billion while volume of shares traded increased by 3.6% to 73.9 million shares.
The banking sector accounted for 51.5% of the week’s traded value with notable movements on KCB (+2.6% to KES 37.15), NCBA (+1.1% to KES 22.95), Equity (-2.7% to KES 34.40) and ABSA Kenya (-0.4% to KES 9.54). Carbacid Investments Plc emerged as the top gainer of the week (+26.8% w-o-w to KES 10.80, 35.0% year-to-date) which we attribute to positive investor sentiment following the company’s announcement that it intends to acquire (subject to shareholder and regulatory approval) 100% of BOC Kenya Plc. In the coming week, we expect demand on some of the counters such as Equity Bank and Safaricom to improve. Overall, we expect price stability.
News Highlights:
DTB Reports a 27.8% y/y Decline in After Tax Profits for 3Q2020
Diamond Trust Bank (DTB) posted a 27.8% y/y decline in after tax profits to KES 4.3 billion (3Q2019: KES 6.0 billion). The decrease in profitability was primarily due to a 232.1% y/y surge in loan loss provisions to KES 2.9 billion.
Total interest income decreased by 3.4% y/y to KES 23.7 billion predominantly due to a 3.3% y/y dip in income from loans and advances to KES 14.3 billion as well as a 67.0% y/y dip in interest income from deposits and placements with other banks to KES 117.3 million. The drop in interest income from loans and advances was despite the group’s loan book growing by 7.1% y/y to KES 205.6 billion. The decline could be attributed to a 81.9 bps decline in yield on loans to 9.5% from 10.3% in 3Q2019.
Interest income from government securities fell slightly by 1.1% y/y to KES 9.2 billion even as the group’s holding of government securities edged up by 5.1% y/y to KES 134.1 billion. The decline could be attributed to a 92.6 bps decline in yields to 9.2% (3Q2019:10.2%).
Total interest expenses fell by 8.9% y/y to KES 9.8 billion owing to an 8.3% y/y drop in customer deposit expenses to KES 8.4 billion. The drop in interest expenses from customer deposits was recorded despite customer deposits growing marginally by 1.8% y/y to KES 288.2 billion. The cost of funds declined to 4.1% from 4.6% in 3Q2019. Consequently, net interest income edged up by 0.9% y/y to KES 13.9 billion resulting in a NIM of 5.6% (3Q2019: 5.7%).
Non-interest income increased by 15.3% y/y to KES 5.0 billion due to a 37.2% y/y rise in foreign exchange trading income. Other fees and commissions declined by 16.8% y/y to KES 1.3 billion. This decline could be due to lower transaction activity as result of the depressed economic environment and zero rating of some transactions as part of the CBK initiative to provide relief to customers.
The contribution of non-interest income to total operating income grew to 26.6% from 24.1% in 3Q2019.
Operating expenses (excluding provisions) rose by 10.0% y/y to KES 9.5 billion mainly due to higher amortization charges (+309.1% y/y to KES 922.0 million) in the period. The cost-to-income ratio (excluding provisions) increased to 50.0% from 47.4% in 3Q2019.
Loan loss provisions surged by 232.1% y/y to KES 2.9 billion even as gross non-performing loans declined by 2.6% y/y to KES 14.7 billion. We attribute the higher provisioning to adverse economic environment (and the Expected Credit Loss model which is more forward looking). The NPL ratio (net non-performing loans/net loan book) fell to 4.0% (3Q2019: 4.9%).
Commentary
The performance for the period highlights the adverse economic environment as result of the COVID-19 pandemic.
As at 1H2020, the bank had restructured facilities worth KES 64.0 billion (32.0% of the net loan book as at 1H2020). Most of the facilities were in the accommodation and hospitality sector (34.4%), real estate (21.1%), manufacturing, transport and communication (13.0%), trade (10.2%) and manufacturing (10.1%).
The improvement in the NPL ratio is surprising given the economic context, DTB’s focus on SME lending (one of the most affected business types) and large exposure to the aforementioned segments (FY2019: e76.0% of the gross loan book). We cannot ascertain whether this was due to loan write offs or actual recoveries. There remains some risk that some of the restructured facilities could turn to NPLs if the government reverts back to the stringent containment measures.
On a positive note, there has been a continued shift to alternative channels (87.0% of the transactions done outside the branch as at 1H2020 from 52.0% in 2018) which we expect will boost non-interest income going forward.
We are currently reviewing our recommendation on DTB.
Recommendation:
SELL – HF
LONG TERM BUY – KENGEN
HOLD – KENYA RE