KCB (Buy, TP KES 54.0) released Q1 20 results with EPS growing 3% yoy, which was poor following a rise in cost of risk to 2.1% in Q1 20 from 1.0% in Q1 19. However, as KCB Group acquired NBK mid-way through 2019, the quarterly numbers are not comparable like for like.
The weakness in asset quality was surprisingly from KCB Bank Kenya (which accounts for 84% of KCB Group's loans), which recorded a 154% yoy jump in loan loss provision against a 4% yoy rise in gross NPLs. NBK Kenya (which accounts for 9% of KCB Group loans) recorded an 18% yoy decline in loan loss provision following a 20% yoy fall in gross NPLs. The weakness in KCB Bank was likely related to SME loans, which at the group level recorded an increase in NPL ratio to 16.4% from 15.6% in Q1 19. Overall group NPL was 11.1% in Q1 19, from 7.7% in Q1 19. We expect asset quality to continue to weaken following the recent announcement that KCB Group has already restructured 15% of its loan book. KCB Group recorded an impressive 31% yoy growth in non-interest income, mainly driven by a 49% yoy jump in mobile banking revenue. Operating costs grew 22% yoy however, due to the strong operating income (+22%yoy), but the cost to income ratio remained steady at 48.5%.
KCB is trading at a current PB of 0.9x against a Q1 20 ROE of 18.9%, which we still consider an attractive discount. We have a Buy recommendation and a target price of KES54.0.
- We expect continued weakening in asset quality and anaemic balance sheet growth for KCB Group, due to Covid-19 related impact.
- We expect the cost of risk to remain elevated as KCB Group is invested in risky segments of the economy including real estate and mortgages, which are likely to continue deteriorating in quality over the coming quarter,s.
- We expect net interest margin to continue declining following the recent cut in the central bank rate on which yields on loans issued prior to November 2019 are linked.
- Fees and commission income growth is likely to be lower in Q2 20 following the regulation to cut fees on bank-to-mobile transactions. However, we still expect mobile loans to support fees and commission growth, hence we don’t expect flat growth.
- Strong balance sheet growth with loans and deposits growing 19% yoy and 34% yoy respectively. This supported the 18% yoy net interest income despite a fall in net interest margin to 10.6% from 11.5% in Q1 20, following a cut in the central bank rate on which old loan’s interest rates are linked. Of this growth, KCB Bank Kenya grew loans and deposits 9% yoy and 18% yoy respectively. NBK Bank grew 4% yoy and 3% yoy. The acquisition of NBK has ensured KCB Group maintained a low cost of funds of 2.7%, which we believe will soften the slide in net interest margin.
- Non-interest revenue grew 31% yoy. KCB Bank grew non-interest income 24% yoy and NBK grew non-interest income 10% yoy. The key contributor was a 49% yoy jump in mobile banking revenue driven by 15% yoy growth in mobile loans. Agency banking revenue also recorded a jump of 94% yoy following a marked growth in cash withdrawal levels. Cash withdrawals are the key chargeable transactions at agencies.
- Operating expenses grew 22% yoy but the cost to income ratio remained at 48.5% on account of higher operating income. KCB Bank Kenya operating costs grew 4% yoy while NBK Kenya grew operating costs by 4% yoy. We believe the key factor driving up operating costs was restructuring costs related to NBK. With an expected decline in operating income, we believe cost to income will rise in the coming quarters.
- 149% yoy jump in loan loss provision, mainly related to KCB Kenya which accounted from 87% of the Q1 20 loan loss provision. NPL coverage rose to 65.3% from 60.8% in Q1 19, with KCB Kenya recording a higher coverage of 72.4%. We believe cost of risk levels will remain elevated on account of weakening asset quality and the continued fall in asset prices, which serve as collateral mainly in the real estate sector.
- Continued declined in the central bank rate would impact margins negatively.
- Covid-19 having a protracted negative impact on business operations.
- Locusts reaching Kenya's food basket and agricultural areas will increase risk of food shortages.
- Continued floods from heavy rainfall will impact harvests of new crops.