Equity Group recorded a 45% yoy increase in non-interest revenue, part of which was loan loss recoveries, and a 19% yoy rise in fee and commission income. The Group saw a 9% yoy decline in Q2 EPS to KES1.53, but on a cumulative H1 19 basis, EPS rose by 9% yoy. Another key positive in Q2 19 was improved asset quality with NPL lowering to 8.6% (from 9.0% in Q1 19), backed by improvements in its Tanzania unit. On the downside, net interest margin continued the downward trend falling 30bps qoq to 8.0% on the back of declining yields on short-term government papers in which the bank is heavily invested. ROE stood at 23.3%.
Reiterate Buy and our target price remains unchanged at KES 46.00 (ETR 19%). The bank is trading at a 2019f PB of 1.4x and PE of 6.6x. The bank is ahead of its peers in non-interest revenue generation, which contributes 47% of its total income. This has been driven by the bank’s head start in technology adaptation and innovation. We believe this lead is sustainable guided by the banks’ strong customer acquisition.
Asset quality improves on the back of Tanzania unit. NPL ratio fell to 8.6% in Q2 19 from 9.0% in Q1 19. By our estimates, the bank managed to recover cKES1.6bn, which is a positive development. We believe the recoveries were in the SME and Micro enterprises in Tanzania (overall NPL ratio fell to 25.7% from 31.6% in Q1 19). Going forward, given the easing monetary policy in Tanzania and improved repayment capability of clients, these NPL levels are sustainable. However, we still consider the management target of 4-5% FY 19 NPL ratio to be ambitious, given the continued weakness in Kenya’s macroeconomic environment.
Net interest margin falls to 8.0%. With yields falling on short-term government securities, where the bank is heavily invested, Equity Group has shifted to more lending – loans and deposits grew 17% yoy. With liquidity ratio at 56.5%, the bank has adequate assets to continue lending. A key concern for us is maintaining asset quality amid the high loan growth.