Absa Kenya: Jump in Q1 21 earnings as separation costs missing in income statement

  • EPS rose 24% yoy to KES0.45
  • Core earnings disappointed with net operating profit down 1% yoy on non-interest income decline & high loan loss charge
  • Loan loss provision charge jumps unexpectedly in Q1 21 despite aggressive provisions in 2020; reiterate Hold

ABSA Kenya released Q1 21 results with EPS rising 24% yoy to KES0.45. Core earnings were unimpressive with net operating profit down 1% yoy on a decline in non-interest income and a jump in loan loss charge. 

Unexpectedly, the separation costs in relation to the transition from Barclays Kenya to ABSA Kenya were absent. We had anticipated these costs to remain within the bank's earnings, but to a much less extent than before. In Q1 20, the separation costs had accounted for 16% of net operating profit. 

Key highlights

Lower cost/income ratio

Cost/income ratio fell to 45.5% in Q1 21 from 47.1% in Q1 20. In our view, the 45% level is sustainable for the bank. Overall operating expenses fell 1% yoy, which is impressively below management's target of keeping expenses growth in line with inflation. The lower expenses also reflect the benefits accrued from operational decisions regarding staff and bank branches carried out by the bank within the last two years. In addition, the bank continues its push to move clients to digital channels for transactions, which has helped reduced expenditure.

Net interest margin remains stable 

Net interest margin slid marginally to 7.9% in Q1 21. This is still above the industry's level helped by the bank's access to low-cost funds through its retail network and funding from the parent company. Management is keen on lowering cost of funds, which is below 3% currently. In our view, the bank is already beating industry cost of fund levels and it would be difficult to bring it closer to 2% unless the overall interest rate environment records a downward trend. Regarding loans, the bank is still trying to acquire market share through competitive pricing and we do not expect much improvement on loan yields. Overall, we expect net interest margin to remain steady or fall in coming quarters. 

High loan loss provision charge impacts earnings

In Q1 21, loan loss provision charge accelerated 25% yoy. This was unexpected, in our view, considering the bank's NPL ratio remained flat yoy and the bank had increased provisions in FY 20 with most of it being Covid-related. While the regulator expects NPLs to peak in June 2021, we had expected ABSA to record lower loan loss provision in 2021 on account of the aggressive provision charges in 2020. Nevertheless, if the bank's asset quality remains steady, we believe there is a chance for lower cost of risk in 2021. 

Despite some recovery in fee income, non-interest revenue underperformed 

Non-interest revenue declined by 4% yoy on lower FX income (-18% yoy). Additionally, other operating income fell 6% yoy, which we believe was related to lower trading income within the quarter. Fees and commission income grew 7% yoy.

We expect stronger recovery in fee income with the lifting of the ban on digital banking fees. However, ABSA Kenya lags behind peers, KCB and Equity Group, in monetising its digital channels and available product suite to clients. While this as a key growth area, it remains to be seen whether the new shareholder structure will allow for more flexibility in local management. Traditionally, ABSA Bank has lacked the agility and stealth of other locally owned banks such as Equity Group, due to bureaucracy and hierarchical decision-making structures. 

We retain our Hold recommendation 

Our target price remains unchanged at KES12.50. The bank is well-capitalised, which supports its plans to acquire more market share. ABSA Kenya is also well-funded and is set to lead its peers in net interest margins. We hope to see improved agility in the business in order to achieve its 2021 ROE target.

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