Earnings Report /

NMB Holdings: FY 19 review: Digital banking push begins to bear fruit

  • Performance bolstered by significant revaluation gains on property

  • Digital banking becomes the new normal

  • We have a target price of $1.35, yielding an upside of 70.86%; we therefore upgrade our recommendation to Buy

IH Securities
12 May 2020
Published byIH Securities

Performance bolstered by significant revaluation gains on property 

NMB presented a fair performance for the full year ended 31 December 2019. During the period, the bank diversified into broader market segments, primarily enhanced digital bank offerings. Stricter credit underwriting led to containment of non-performing loans. Fair value gains on investment properties contributed significantly to net income. Net interest income was up 76.13% y/y to ZWL$53.67mn from ZWL$30.47mn, while fees and commission income grew 205.69% y/y to ZWL$87.24mn from ZWL$28.53mn as a result of increased transactional volumes sustained by the increase in account acquisitions and increased usage of digital banking platforms. Resultantly, the Group recorded a 579.14% y/y growth in total income to ZWL$447.39mn in FY19 from ZWL$65.88mn in FY18 as other income, comprised mainly of fair value adjustments on investment properties, surged to ZWL$206.62mn FY19 from ZWL$4.96mn FY18.

Digital banking becomes the new norm 

FY 20 is likely to present more headwinds to the banking sector as core lending remains restricted. Indirect interest rate caps have quintessentially returned as the RBZ cut policy rates, from 25% to 15% and the medium-term bank accommodation rate from 15% to 10% with banks that access the MBA facility seeing their interest rates capped at 20%. Whilst the measures are designed to stimulate post Covid-19 business recovery, they further entrench sub-inflation returns. However, Covid-19 may also provide a boon as customers will rely more on digital banking as social distancing measures continue. Thus, we anticipate the bank to continue its drive into the digital space providing more product offerings as digital banking fees contribute a significant portion (57%) to fees and commission income. The Bank has significantly improved its NPL ratio to 1.37% (vs 7.43% at FY18) and management attributes this to its stricter credit and risk management strategy favouring lending to creditworthy counterparties. However, we note that drifting further away from core lending activities will continue to impact overall income generating ability. Nevertheless we anticipate net interest income for the period to reach $150.11mn, up from $53.66mn reported in FY 19; we believe the bank’s efforts to grow their fee and commission income will continue and we therefore forecast fee and commission income of $170.12mn for FY 20, up from $87.24mn recorded in FY 19.

Upgrade our recommendation to a Buy 

We forecast total income to grow 61% in FY 20 to $717.98mn, up from $447.39mn recorded in FY 19. We forecast RoAEs to soften to 51.2% in FY20 from 76.3% in FY19. We estimate NMB trades on a P/BV (+1) of 0.32x and P/E (+1) of 0.78x to FY20 versus regional peers at P/BV 0.88x and P/E (+1) 2.87x. Resultantly, using a combined DDM and Static ROE model, we come to a target price of $1.35, yielding an upside of 70.86%. We therefore place a Buy on NMBZH.