DTB’s EPS rose 11% yoy to KES13.89 in H1 19. On a quarterly basis, Q2 19 EPS was up 13% yoy to KES7.34. This was 4% above our expectation, mainly on lower than expected loan loss provision charge. Excluding the loan loss provision charge, performance was much weaker with pre-provision earnings down 11% yoy on weaker net interest margin as a consequence of lower interest rates and preferential pricing. Balance sheet performance was also disappointing, with net loans down 4% yoy. DTB has consistently been reducing lending and has yet to shift strategy, unlike Tier 1 banks which are moving towards lending. Deposits grew just 1% yoy. Q2 19 ROE was 14.6%, in line with our 2019 forecast.
We retain our Buy recommendation on DTB Bank, with our unchanged target price of KES154.0 suggesting an ETR of 33%. The bank is trading at a 2019f PB of 0.6x and a PE of 3.9x. The weak share price performance has been a result of lower asset quality, which is a shift from the bank’s historically high asset quality and coverage levels. Additionally, in the current rate cap environment, preferential pricing has led to faster margin erosion than for peers. However, the bank remains the regional leader in contribution to PBT (17% in H1 19) and cost efficiency, despite continued investment in its regional business.
Margins to remain under pressure. Net interest margin declined to 5.7%, from 6.1% in Q2 18, following a cut in loan yields. Due to preferential pricing for its shareholder associated clients, the bank faces greater margin erosion than the sector. We do not expect an uplift in margins as the bank’s lending remains low and interest rates on government securities continue to fall.
Gross NPL to net loans increased to 7.9% from 7.7% in Q2 18. Due to some write-offs made earlier, coverage levels remain low at 35% compared to Q2 18’s 55%. In our view, given that DTB is operating on lower coverage than we anticipated, we expect the bank to increase its cost of risk. Compared to other banks, DTB’s management has always been keen to retain high coverage and we expect coverage levels to return to higher than 60% over the next two years. This is an upward risk to our cost of risk assumptions of 1.0% for 2019f and 2020f.