Earnings Report /
Kenya

Equity Group: 9M 21 – Robust top line and lower provisions boost earnings; retain Hold

  • Digital banking franchise continues to support non-interest revenue growth even as margins remain low

  • Asset quality improves with management raising coverage levels. Q4 21 outlook remains positive

  • We retain our Hold recommendation with a TP of KES 46.00

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
9 November 2021
Published by

Equity Group released 9M 21 results with EPS increasing 78% yoy to KES7.0. Despite a weak net interest margin, the bank's top-line performance was robust with total income growing 25% yoy, rising on strong non-interest revenue and balance sheet growth. Loan loss provision charge also declined 68%, with the bank recording notable asset quality improvement and higher coverage levels. 

We retain our Hold recommendation with a TP of KES46.00

Strong non-interest revenue performance driven by non-volatile fee and commission income remains a strong earnings driver for the bank. An increase in coverage level of 91% should offer comfort to investors, even though the outlook on asset quality remains murky despite notable improvements. Our concern remains on weak net interest margin, with the bank unable to make the most of the higher-yield advantage of its large SME loan book. Additionally, the bank remains keen on acquisitions, with management noting the possibility of acquiring a local bank. We had noted earlier that the Kenya banking sector is ripe for acquisitions, but did not anticipate Tier 1 banks to be key players in M&A. If Equity Group is to make an ROE-accretive purchase in Kenya, it should be a Tier 2 bank that will give it a market share advantage in balance sheet as well as profit.

Asset quality improving with better coverage levels

The bank's NPL ratio declined to 8.9% in Q3 21 from 10.7% in Q2 21 and 10.4% in Q3 20. Management noted that the bank will not be releasing provisions in the coming quarter. NPL coverage stood at 91% in Q3 21 with cost of risk at 1.4%. Management has set an NPL target of 7-10% in FY 21. Although earlier we were sceptical about management achieving its target, we now note the better-than-expected performance of asset quality in the banking sector, the unexpected lifting of lockdowns and curfews offering a much-needed boost to economic activity, and vaccination rates continuing to gain ground. In Q4 21, business activities are expected to record a much better performance. 

Non-funded income continues to support revenue

The bank's non-interest income increased by 29% yoy – a majority of this strong performance was driven by digital transactions. Mobile transactions now account for 46% of total transactions in the bank compared to 35% in Q3 20. Digital transactions increased by 60% yoy with the transaction values increasing by 123% yoy – 74% of transactions are now carried out digitally compared to 52% in Q3 20. We also note here that the banking sector had previously experienced a surge in agency banking transactions with Equity Group emerging as the key winner

Efficiency gains continue to boost income

Impressively, Equity Bank Kenya has a cost/income ratio of 39.8% in line with the bank’s overall target of a sub 40% cost /income ratio. The bank is keen on Equity BCDC (Congo) reducing its cost/income ratio as it completes the integration of its recently acquired unit (BCDC Congo). Apart from acquisitions, which management has highlighted an interest in, the bank does not have other significant costs that would result in a future uptick of its cost/income ratio. 

Net interest margin remains underwhelming at 6.6%

This is below the management target of 7.0-8.0% for FY 21. While balance sheet growth was positive with 23% yoy loan book growth and 27% yoy deposit growth, continued weakness in loan yields weighed down margins. Loan yields remain suppressed in the market as loans are still priced relatively close to the now repealed loan rate cap, with the average loan yields for Equity Group at 11.8% in Q3 21. This is a far cry from Equity Group's pre-rate cap historical average of about 16.0%. We believe Equity Group's net interest margin will remain subdued until the regulator finalises its decision on allowing banks to lend using their own metrics to calculate loan yields.