Equity Analysis /
Zimbabwe

First Capital Bank: FY 18: Net interest income drives impressive revenue performance

    Takudzwa Sherekete
    Takudzwa Sherekete

    Junior Equities Analyst

    IH Securities
    3 May 2019
    Published by

    Net interest income drives profitability

    Net interest income grew by 86.22% to $40.05mn, up from $21.51mn largely buoyed by a significant increase in the investment in government securities and a 73.8% improvement in net loans to $194.68mn. Interest expenses increased to $1.43mn, in line with the increase in the deposits. Despite the increase in the transacting population’s adoption of mobile and electronic banking platforms, the bank realised a decrease in the non-funded income from $32.41mn to $27.5mn. The decline was a result of the lack of investment in the old IT system, which the bank has since replaced with the new banking system.

    The bank is in the process of concluding the IT migration process to a more suitable and integrated system, which is expected to recover the lost fees, gain and retain customers. Impairment losses on loans and advances increased by 2,312.7% from $0.10mn to $2.461mn due to the adoption of IFRS 9. A cost/income ratio was 66%, higher than the previous year due to migration-related costs incurred mainly in information technology projects and brand change. Loans and advances to customers grew by 73.8% y/y to $194.68, up from $112.04mn in FY 17.

    The bank’s NPL ratio improved 1.0% in FY 18 from 2.2% in FY 17 to on the back of high-quality asset book. Deposits grew by 24.7% to $553.6mn from $443.8mn, subsequently the loan/deposit ratio was raised to 36% in FY 18 from 26% in FY 17. The bank recorded a NAV of $698.74mn in FY 18. The bank did not declare a dividend for the year necessitated by a more prudent approach on the Bank’s capital base.

    We maintain a U/R rating 

    We expect NIMs to increase in FY 19 in line with the imminent interest hike in FY 19. We have forecast net income of $26.63mn in FY 19, 9.4% higher yoy. We expect RoAEs to rise in FY 19 and FY 20 to 26.2% and 27.5%, respectively and moderate to 23.9% in FY 21. We estimate that the bank is trading at PE (+1) of 4.04x to 2019e versus peers at 9.53x and PB (+1) of 0.94x versus peers at 1.8x. Whilst the metrics appear attractive, we maintain a U/R rating as the severe dislocation between interest rates within the core lending business and current inflation remain a cause for concern. Additionally, the introduction of the RTGS$ as a currency exposes the banking sector to solvency risk, due to potentially significant mismatch between foreign currency assets and liabilities.