Equity Analysis /

CBZ Holdings: HY 19 results: Widening income streams support earnings

    Takudzwa Sherekete
    Takudzwa Sherekete

    Junior Equities Analyst

    IH Securities
    15 October 2019
    Published by

    Non-interest income driving growth

    Net interest income for H1 19 increased by 17.6% to ZWL$47.92mn from ZWL$40.76mn, despite interest income marginally declining 0.5% to ZWL$68.83mn. Net non-interest income improved by 317.3% to ZWL$199.12mn, buoyed by a ZWL$158.17mn contribution from fair value adjustments on investment properties, offsetting a ZWL$41.89mn unrealised loss on foreign currency position. Net underwriting income grew 37.8% to ZWL$6.47mn from ZWL$4.70mn in H1 18, resulting in total income for the period increasing 172.1% to ZWL$253.51mn from ZWL$93.17mn in the prior comparable period. Operating expenditure for the half-year increased 76.5% to ZWL$93.85mn, accounting for a 92.8% growth in staff costs, whilst the cost/income ratio declined to 37.0% from 57.1%.

    Consequentially, PAT improved 300.5% to ZWL$137.40mn from ZWL$34.31mn in the prior year. Total comprehensive income surged 1,610.7% to ZWL$586.95mn from ZWL$34.31 in H1 18, attributed to a ZWL$206.77mn gain in property revaluation and a ZWL$253.64mn exchange gain from the change in the functional currency. Total assets for H1 19 grew 51.6% to ZWL$3.71bn from ZWL$2.45bn, arising from the adoption of IFRS 16 on 1 January 2019.

    NPLs for the period remained stable, marginally increasing by 0.1% to ZWL$100.20mn from ZWL$100.13mn reported in FY 18, resulting in the NPL ratio reducing from 16.4% to 12.6%. Gross loans and advances improved 29.1% to ZWL$772.95mn from ZWL$598.70mn in H1 18, with the distribution, private and agriculture sectors accounting for 26.3%, 22.2% and 20.2% of the loans, respectively.

    Accounting for the allowance for expected credit loss of ZWL$123.96mn, net loans and advances amounted to ZWL$648.99mn in H1 19. Total deposits for the period augmented 29.4% to ZWL$2.69bn from ZWL$2.08bn, of which the services sector accounted for 49.6% of the loans, 14.0% from the distribution sector and 10.1% from the manufacturing sector. Resultantly, the group reported a loan-to-deposit ratio 24.0%.

    Total liabilities increased 32.0% to ZWL$2.82bn from ZWL$2.13bn in H1 18. Therefore, the group recorded a 183.8% growth in NAV to ZWL$896.29mn from ZWL$315.80mn in the prior comparable period. The groups’ liquidity ratio for the period stood at 75.0%, above the 30.0% regulatory requirements, and the capital adequacy ratio of 32.0% was also above the 12.0% requirement. CBZ has proposed an interim dividend of ZWL1.06 cents per share, translating to a growth of 113.0% on H1 18 interim dividend.

    Focus on diversifying income streams

    During the period under review, CBZ remained profitable attributed to a significant contribution from fair value adjustment on property and investments, which arose from the translation of foreign currency balances to ZWL$. Going forward, we anticipate that the bank’s earnings will begin to moderate as foreign exchange gains alleviate on account of a relatively stable exchange rate. To endure the volatility of the economic environment, management have indicated that they will concentrate on diversifying their income streams, while focusing on liquidity and cost management.

    Additionally, the company has stated that they are aiming to increase their presence in the property sector, which contributed ZWL$36.06mn to total income in HY 19. The RBZ through the 2019 Mid-Term Budget announced that all Tier 1 banking institutions are required to hold core capital worth at least ZWL$200mn by December 2020. Management have indicated that the regulatory requirement is achievable by the stipulated deadline.

    Updating our recommendation to Hold 

    We expect the group to maintain profit growth and have therefore forecast FY 19 net income of ZWL$483.01mn, up from ZWL$72.17mn reported in FY 18. The valuations were carried out on normalised earnings and ROE from FY 20. Nevertheless, we estimate ROE at 53.7% for FY 19, up from 24.3% in FY 18. We now estimate that CBZ trades on PER (+1) 0.92x, and P/BV (+1) 0.33x to 2019e, compared to regional peers, at PER 9.50x and P/BV 2.46x to 2019. While the metrics appear attractive, using our combined method of DDM and Static ROE, we arrive at a TP of ZWL$0.62.

    We update our recommendation to Hold from U/R as the introduction of the local currency gives a clearer picture of the solvency and potential mismatches in individual balance sheets; while the increase in accommodation rate provides some interest rate direction.