Earnings Report /

Absa Kenya: 9M 21: Bank hits management ROE target of 20%; new level seems sustainable

  • Exclusion of separation costs and lower loan loss provision charges boost earnings

  • Revenue depressed by weaker margins and subdued non-interest revenue performance

  • Reiterate Hold. The new 20%+ ROE levels are sustainable given the leaner cost structure

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
23 November 2021
Published byTellimer Research

ABSA Kenya has released its 9M 21 results, which see EPS jumping to KES1.52 from KES0.35 in 9M 20. The key performance drivers include:

  1. The exclusion of separation costs following the completion of the rebranding programme. In 9M 20, separation costs accounted for 36% of PBT;

  2. Loan loss provision charges decreased 55% yoy, further lifting earnings;

  3. Operating costs declined 3% yoy; and

  4. Revenue was still weak on a lower net interest margin (50 bps decline qoq) and low non-interest revenue growth (+5% yoy). 

Hold recommendation with a TP of KES12.50

Our Hold recommendation is based on:

  1. The slow growth of non-interest revenue, even though the bank has the capacity to generate income as high as that of its peers, Equity Group and KCB. ABSA Kenya has a strong retail network that it can leverage to increase fee and commission income from digital channels. Although there has been increased usage of the bank's digital channels, it is behind its peers on monetisation, not least because ABSA was relatively late in launching its digital banking solutions.

  2. ABSA's higher-than-industry net interest margin, boosted by its low cost of funds, which is both a function of the bank's strong footing in the retail market and continued cheap funding from its parent company. As a percentage of interest-earning assets, balances due from group companies are 19%. This source of funding is a key advantage for ABSA that other banks do not possess.

  3. Its lower-than-industry cost/income ratio. Following separation and the closure of some branches, the bank now has a below-industry cost/income ratio of 44.1%.

  4. Management's untested abilities. ABSA has been overtaken by local banks in the Kenyan market due to the latter's ability to quickly integrate locally suitable solutions. ABSA took much longer to do this due to the group's bureaucratic decision-making processes. With new shareholders now on board, we are keen to see how agile management will be, especially in the digital transactions space.

ABSA trades at a PB of 1.1x against a 9M 21 ROE of 21.2%.

Key positives

  1. Cost/income ratio now at 44.1% from 49.1% in 9M 20 in line with management's promise of a continued reduction. We do not expect the bank to have significant future cost pressures except from increasing its technological capacity. Overall, we expect cost growth to remain well below inflation.

Key negatives

  1. NPLs increased 17% yoy. On a qoq basis, gross NPLs increased by 7%, bucking the trend of asset quality improvement seen in the sector. The bank’s loan loss provision charges declined 55% yoy as it continued to wind down some of the provision charges allocated last year because of the pandemic. We expect further provisions to be released in Q4.

  2. Non-interest revenue growth was low, at 5% yoy. Fee and commission income grew 12% yoy, which was likely tied to increased transactions on digital channels. But we believe the bank has room to increase its digital banking fee income, to catch up with other Tier 1 banks. Exchange income declined 3% yoy, while other operating income increased 5% yoy, which we believe was tied to trading income from government securities.

  3. Decline in net interest margin but still above peers. Net interest margin declined to 8.0% in Q3 21 from 8.5% in Q2 20. This was not unexpected in our view as the Central Bank of Kenya is still in the process of allowing banks to price loans using their own risk-based models. According to KCB, this process will likely come to a close in 2022.