Equity Analysis /
Kenya

Absa Kenya: Separation costs dampen earnings, but upgrade to Buy on valuation

    Faith Mwangi
    Faith Mwangi

    Equity Research Analyst, Financials (East Africa)

    Tellimer Research
    3 June 2019
    Published by

    Q1 19 EPS unchanged at KES0.35. Excluding the KES243mn separation costs from the sale of Barclays PLC stake, PBT rose by 12% yoy. This was on the back of a 14% yoy increase in non-interest revenue driven by fees income as well as trading income. Total operating costs (excluding the separation costs) was down by 3% yoy, with the bank continuing to focus on digitising transactions and reducing branches. Balance sheet performance was positive with loans up by 9% yoy and deposits up by 16% yoy. ROE stood at 16.8% versus our 17.5% target.

    We upgrade Barclays Bank to Buy from Hold on price weakness. Our target price is unchanged at KES12.50 (ETR of 31%). The bank trades at 2019f PB of 1.1x and PE of 7.2x, and its net interest margins are higher than local peers’, driven by low interest earnings deposits. Barclays has a high retail market share where it has gained significant traction in the credit card business. We expect the bank’s transition to a new shareholder structure to improve its ability to adapt and provide more local solutions. In the next three years, the bank will be transitioning to its new brand name ABSA Kenya; we expect separation costs to be incurred during this period.

    Non-interest revenue up by 14% yoy, boosted by a 12% yoy increase in fees income. The bank had c3mn users by end-2018 since its mobile banking app was launched in H1 18. Like other Tier 1 banks, Barclays is moving to digitalise its transactions and create income from alternative channels. Meanwhile, other income more than doubled in Q1, which we believe was related to allocation of securities trading being increased recently – now 9% of assets compared with 2% historically.

    Gross NPLs/net loans now at 8.5%. In line with the 22% yoy increase in gross NPLs, loan loss provisions rose by 11% yoy. Although the bank remains upbeat on lending, there has been a notable scaling down in the unsecured segment. Over the last four years, continued aggressive growth in the unsecured retail segment has reduced the bank’s asset quality. Since the corporate segment is expected to remain weak, we don’t expect significant asset quality improvement in the bank.