Equity Analysis /
Rwanda

Bank of Kigali: Investor day to highlight positive outlook; Buy

    Faith Mwangi
    Faith Mwangi

    Equity Research Analyst, Financials (East Africa)

    Rahul Shah
    Rahul Shah

    Head of Financials Equity Research

    Tellimer Research
    3 May 2019
    Published by

    The 9 May investor day is set to showcase a solid story, reflecting strong balance sheet growth, stable-to-improving margins, stronger fee income generation, better cost efficiency and rising asset quality.

    Reiterate Buy with an unchanged TP of RWF309 (ETR 21%). Bank of Kigali (BoK) is trading at 2019f PB of 1.0x and PE of 4.6x. Our rating is based on: 1) BoK being the largest, most profitable bank in Rwanda; 2) its strong corporate banking franchise; and 3) its above industry average asset growth. However, its foray into retail banking is a risk to asset quality.

    Healthy growth outlook: Management believes it can deliver 20-25% pa loan growth. Recent capital increase will allow the bank to compete for large-ticket infrastructure deals. There are also good growth prospects for SME and retail. We forecast an average loan growth of 15%, but there are upside risks since the bank outperformed our estimate by 13% in FY 18. 

    Margins to stabilise. A shift to higher-margin SME/retail lending and limited price competition in the large corporates segment should support asset yields. We see margins averaging 10.9% over our forecast period. 

    Digitalisation set to drive improved cost efficiency. Management has high expectations for its recently launched electronic wallet and sees it as a catalyst for a sharp rise in digital transactions and more retail customers. Rising digital transactions should help trim physical infrastructure (eg branches and back-office processing), helping the cost/income ratio remain below 50%. We, however, do not expect significant income traction from digitisation as the first few years will be spent on customer conversion. 

    Loan quality outlook appears benign. Management expects a few sizeable problem exposures to become performing in 2019. In addition, given the strong macro environment (the IMF forecasts 7.8% real growth in 2019), we expect a broad-based underlying improvement in the portfolio. We forecast an average NPL ratio of 6.3% over our forecast period. 

    We forecast ROE to settle at 20.9% by 2023. Compared with management comments, we are more positive on the cost outlook and more conservative on asset quality.