Bank of Kigali (Hold, TP unchanged at RWF309) released FY 19 numbers marking a 36% yoy rise in PAT, which is positive. Key drivers were: 1) a lower tax rate of 28% from 36% (PBT was up 22%, but due to the lower tax rate, PAT increased 36% yoy). In 2018, the Rwanda Revenue Authority disallowed some IFRS 9-related impairments from tax exemption; 2) higher net interest margin of 11.0% from 10.4% on account of higher loan yields; 3) modest operating cost growth of 2% yoy following an 11% yoy decline in other operating expenses. On the downside, cost of risk rose to 2.7% with the bank’s NPL ratio rising to 5.7%. FY 19 ROE stood at 18.0%.
The bank is trading at a current 2019 PB of 0.8x. We downgrade the bank to Hold pending a review of the recent lockdown in Rwanda, which we believe places significant downside to our balance sheet and earnings estimates.
- Rwanda recently set new bank regulations where the regulator cut fees on bank-to-mobile wallet and card transactions, and expanded limits for mobile wallet transactions. We expect Bank of Kigali to lose some fee income as about 16% of total income is fees income. Even then, we see this impact as temporary and expect the bank to benefit post-Covid-19 from higher usage of alternative channels.
- Management has a loan and deposit growth target of 20-25% in 2020 and 2021, which we see as quite high considering the country is already in lockdown following the confirmation of Covid-19 cases in the country (at present, there are 50 confirmed Covid-19 cases).
- We also expect non-performing loans to be higher than the 4-5% management target for 2020. Even though the regulator allowed for extension of loan terms, we believe the impact of Covid-19 will still result in higher NPLs.
- Net interest income increased 25% yoy to RWF94.8bn driven by higher net interest margin and robust balance sheet growth.
- Robust balance sheet growth with deposits and loans growing 21% yoy and 19% yoy, respectively. The bank still commands a large market share in Rwanda, which continues to support balance sheet growth. However, in 2020, given the recent lockdown, we expect balance sheet growth to reduce to single digits for the bank.
- Net interest margin increased to 11.0% mainly on increased loan yields at 16.2% from 15.3%. The bank has been consistently pursuing higher retail and SME lending in order to boost margins. With the bank pursuing price competition as a way to gain market share, we believe this will impact the rapid increase in net interest margin.
- Operating cost growth was minimal at 2% yoy. Salaries grew in line with inflation at 7% yoy. We expect this to be the trend going forward with additional personnel cost being influenced by tech-related hiring as the bank seeks to grow its technology platform. Other operating expenses declined 11% yoy.
- Reversal of tax rate to 28% from 36% in FY 18, which resulted in a 3% yoy decline in tax expenses. The tax rate was higher in 2018 after the Rwanda Revenue Authority disallowed some IFRS 9 impairments from tax exemption.
- As expected, the insurance business delivered strong growth implied by the 16% yoy growth in other non-interest income. We expect the growth related to the insurance business to continue riding on the bank’s large corporate and retail network to build clientele.
- Non-interest revenue decreased by 7% yoy. This was due to a 14% fall in fees and commission income and 4% yoy decline in FX income. We expect the recent cut in fees on bank-to-mobile and card transactions to have a negative impact on Bank of Kigali, at least in H1 20.
- Cost of risk rose to 2.7% in FY 19 from 2.1% in FY 18. NPL ratio rose to 5.7% from 4.9%. We expect further weakness in 2020 on account of Covid-19 impact. Post Covid-19, the bank is keen on growing its retail and SME loan book, which is likely to result in sustained weakness in asset quality.
- Continued Covid-19 contagion extending Rwanda’s lockdown period.
- Regulatory risk related to Covid-19 containment.