Earnings Report /
Kenya

Absa Kenya: Earnings positive excluding one-off separation costs; Buy

  • Balance sheet growth better than historical average, with loans and deposits growing 10% yoy and 15% yoy, respectively

  • Non-funded income growth supported by mobile platform, Timiza, but volumes still behind peers

  • Management retains target ROE of 20% in three years

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

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Tellimer Research
24 March 2020
Published byTellimer Research

Absa Bank Kenya (formerly Barclays; Buy, TP 12.50) has announced its FY 19 results, with EPS remaining unchanged at KES1.37. 

The numbers were weak due to the separation costs from the sale of the Barclays PLC stake, which amounted to KES1.5bn. Excluding these costs, normalised EPS was KES1.56, which represents 14% yoy growth – positive in our view. Non-interest revenue grew by 9% yoy, with Timiza – the bank’s mobile banking platform – delivering increased fee and commission income. 

Balance sheet growth was positive, with loans growing by 10% yoy and deposits up by 15% yoy. These are strong numbers for Absa Kenya considering the bank has had an average growth rate of below 10% for the past five years. Management intends to maintain this momentum to see the bank deliver 20% ROE after the three-year separation period. Normalised ROE as at end-FY 19 was 18.4%.

Absa is trading at a 2020f PB of 1.0x and PE of 6.3x. The bank retains a strong capital position, sustaining its above-industry dividend-payout level. There has been a notable gain in the momentum of its balance sheet growth and visible management flexibility. Delivery of the intended 20% ROE is heavily reliant on whether management can achieve higher autonomy in order to keep up with the agility of its local peers. 

Outlook

  • Management targets an ROE of 20% after the three-year separation period. Currently, ROE stands at 18.4% (end-FY 19). We believe achieving this target will be depend on management’s ability to deliver on cost management, balance sheet growth and a wider net interest margin.
  • As with other banks, management concerns about coronavirus will lead to Absa scaling back lending in the coming months. Management expects loan growth to be much slower in 2020 – a sentiment with which we concur. 
  • Following the cut in the central bank rate, management expects a lower net interest margin in 2020 as more than 50% of the bank's loans are linked to the policy rate. 
  • Management intends to focus on non-interest revenue growth in 2020. Given Absa Kenya's lower-than-industry rate of mobile banking transactions, we expect the impact on the bank's fee and commission income to be minimal following the regulator's directive to cut fees on mobile wallet transactions

Positives

  • Non-funded income growth of 9% yoy. Absa Kenya launched a mobile banking platform in 2018, which was embedded with a loan product. The bank now has 36% of transactions on digital channels, with loan disbursements at KES20bn since the launch. The bank’s product is still in its early stages compared with that of KCB and Equity Group and may not see the fast growth of its two local peers, which benefitted from first-mover advantage. We, however, expect digital transactions to cross the 50% mark in 2020 as non-cash transactions are encouraged by government. 
  • Operating costs grew be a mere 1% yoy, with the cost/income ratio at 51.2% (from 54.2% in FY 18). This excluded the KES1.5bn separation costs. The bank is still focused on growing its balance sheet, retail network and non-funded income sources. Although we envisage the bank retaining its below-inflation operating cost growth, we expect major expenses to be staff hiring for specialized skill and technology improvement. 

Negatives:

  • Loan loss provisions grew by 9% yoy, but gross NPLs declined by 3% yoy. Management expects NPLs to rise in 2020 on account of Covid-19, and we expect the cost of risk to remain high, in order to maintain coverage levels of above 75%.