KCB Group’s EPS rose 5% yoy to KES4.15 in H1 19, (flat qoq at KES 2.27). This was 19% above our expectations driven mainly by better-than-expected non-operating income and low operating costs. Mobile banking drove the bank’s non-branch revenue to jump by 131%. Overall non-interest revenue rose 15% yoy with management upbeat about achieving a 20% yoy growth in FY 19. The loan book growth was impressive at 14% yoy, with KCB now moving to lending following lower interest rates on government securities. Operating costs remained flat with management noting that natural staff attrition eased costs. The bank’s ROE was 23.5% versus our 19.7% estimate.
Reiterate Buy. Our target price remains unchanged at KES54.00 (ETR 43%). The bank is currently reaping the benefits of its mobile banking system upgrade between 2017-2018, which we expect to continue supporting non-interest revenue. Management, meanwhile, shelved planned staff redundancies this year as natural attrition saw staff numbers progressively decrease. We expect cost growth to remain subdued in 2019. Also, with the bank now shifting to more lending, we expect net interest margin stability in H2 18 as the bank acquires higher-yielding loan assets.
Strong non-interest revenue growth. Mobile banking revenue jumped 218% yoy. We believe these income levels are sustainable based on: (1) a high retail client market share, (2) the ready adoption of mobile banking products by clients and, (3) the recent mobile banking platform upgrade, which increased transaction levels. The bank’s lending products were the key income drivers. While the growth is positive, we remain concerned about climbing default rates across mobile lending applications. According to FinAccess, Kenya mobile bank loans face the second-highest default rates mainly as clients spend a large percentage of money on basic needs, or fail to understand the pricing of the extended credit.
NPL stable at 7.8%. This is slightly higher than our FY 19 forecast of 7.5%. With the bank now moving to higher loan book growth, we expect asset quality to remain weak, given that most credit opportunities are in the strained manufacturing segment.