CRDB recorded a 215% yoy jump in Q1 19 EPS to TZS11.75, far above our TZS4.84 estimate. The key surprise elements include: 1) higher net interest margin of 10.5%, driven by high loan book growth (11% yoy) and higher allocation to interest-earning assets; 2) lower-than-expected cost growth (10% yoy) leading the cost/income ratio to fall to 60.6% in Q1 19 from 67.5% in Q1 18; 3) improved asset quality with NPL ratio falling to 8.8% (from 12.7% in Q1 18). This was mainly on the back of revised regulations requiring sooner write-offs and write-backs. We expect these numbers to continue to improve in 2019 should macroeconomic variables remain unchanged. ROE in Q1 was 15.8% versus our 6.5% estimate.
Reiterate Buy. Our target price remains unchanged at TZS155 (ETR 41%). CRDB trades at a 2019f PB of 0.3x and PE of 3.1x. Given the stronger-than-expected performance in Q1 19, we believe the bank is trading at a steep discount. In addition, CRDB’s performance presents upside risks to our FY 19 forecasts, where we expect ROE at 10.4% driven by: a lower net interest margin of 9.6%, a higher cost/income ratio of 65% and lower asset quality with an NPL ratio of 9.4%.
Loan book growth on track boosted by lower interest rates. Loan book growth was 11% yoy, higher than the 9.6% yoy average private sector credit growth. The overall industry loan book growth was boosted by agriculture (46% yoy), mining & quarrying (37% yoy) and personal lending (18% yoy). These three sectors contribute c70% of CRDB’s loan book. There has been a continued decline in lending rates following the Bank of Tanzania’s decision to cut the discount rate by 200bps. We expect the double-digit loan book growth to remain high as the regulator remains keen on easing monetary policy.
Cost/income ratio now at 60.6%. This is much lower than our 65% 2019 estimates. Following a costly physical expansion strategy, the bank is now focusing on digitalising its customer base. As of 2018, 85% of transactions were taking place outside branches. In our view, CRDB needs to monetise these transactions and improve branch efficiency for better returns.