Equity Analysis /

Kenya Banks: Sector Q3 21 PBT jumps 68% yoy, and outlook for Q4 is positive too

  • Asset quality continues to improve with industry NPL now at 13.6% in Q3 21; outlook for Q4 points to further improvement

  • There continues to be a notable increase in credit demand but low rates keep credit growth lower than expected

  • KCB remains our top pick in Kenya banks – we have a target price of KES54

Kenya Banks: Sector Q3 21 PBT jumps 68% yoy, and outlook for Q4 is positive too
Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
22 November 2021
Published by

Kenya banks' sector-wide profit before tax (PBT) grew 68% yoy in Q3 21, according to the latest data from Central Bank of Kenya. On a cumulative 9M 21 basis, PBT increased 63% yoy.

Of our covered banks that have released results, KCB Group leads the pack with a 131% yoy jump in 9M 21 PAT, Equity Group comes in second with a 78% yoy increase and Co-op Bank comes in third with a 19% yoy rise.

Some key trends in Q3 21 earnings performance include:

1.     Improved asset quality with industry NPL ratio at 13.6% in Q3 21. This is lower than the 14.0% and the 14.6% NPL ratios recorded in Q2 21 and Q1 21 respectively. Relative to Q3 20, gross NPLs have increased 8% yoy, which was lower growth than we had expected and below the regulator’s projections.

Q4 21 expectations: According to a survey carried out by the regulator, only 26% of Kenyan banks expect asset quality to decline in Q4 21. Banks mentioned increasing recovery efforts in the trade, personal household, building and construction, real estate, and manufacturing segments.

In our recent report, we noted the trade segment, which is predominantly SME, continues to strain asset quality in the sector. However, with the lifting of curfews and resumption of business activity around the holiday season, we expect trade to be a key beneficiary of the improving business environment and hence anticipate lower NPL ratios. In our view, we believe the regulator’s projected 18.9% NPL ratio for December 2021 is far too pessimistic and we believe it is likely the industry will close with an NPL ratio below 13%.

Asset quality improvement now leading industry NPL ratio toward pre-pandemic levels

2.     Increased credit demand but tightening credit standards hinder growth. According to the Central bank of Kenya, in Q3 21 the industry saw increased demand for credit in the personal household, trade and manufacturing segments. Industry gross loans grew 8.5% yoy in Q3 21.

According to the regulator, most of this demand was related to a return to normal in the economy with the removal of curfew and the president’s commitment to not institute further lockdowns. Equity Group exceeded our expectations in Q3 21, recording 23% yoy growth in loans, while KCB and Co-op were within expectations at 12% yoy and 13% yoy loan growth respectively.  

Q4 21 expectations: Despite the positive private sector credit growth momentum witnessed in Q2 21 and Q3 21, we do not expect the banking sector to achieve the 10.2% yoy growth for December 2021 that was projected by the regulator. Banks have continued to record tightened credit standards across the board, which limits accessibility.

Specifically, banks reported tightened standards for real estate (which accounts for 14% of total industry loans) and tourism and hotels which has been significantly impacted by the pandemic. Additionally, though the trade sector is now opening up with the resumption of business, the sector no longer offers interest margin advantage but still has weak asset quality, therefore lowering the attractiveness of the sector in general. In our view, private sector credit growth will likely remain in single digits in Q4 21.

Private sector credit growth is recovering but yet to meet regulator target

Central Bank of Kenya Credit growth targets

3.     Margins remain under pressure. According to the regulator, despite banks increasing their lending activity, they are still primarily lending to the government. In Q3 21, the overall sector liquidity ratio was 56.7% compared to 53.2% in Q3 20, showing banks are still parking funds in government securities. The gross loans to deposit ratio was 73.5% in Q3 21 compared to 75.4% in Q3 20. Long-dated government securities are offering yields similar to loan yields, hence crowding out the private sector. Shorter-dated securities have had declining interest rates, but the rates have not declined far enough to dissuade banks from investing in the securities. With banks yet to be allowed to use their own risk-based models to price loans, margins are set to remain under pressure.

Q4 21 expectation: The regulator has made little change to the loan yields approval discussion, hence loan yields will likely remain flat. We do not expect an upward revision to the central bank rate, hence loan yields will remain flat. On deposits, banks may face some pressure as corporate deposits will likely demand higher interest rates considering that government interest rates are offering better returns. Even then, we expect Equity Group and KCB to maintain a stable cost of funds as these banks have access to cheap retail deposits. We expect the overall net interest margin to remain flat or slightly decrease across our covered banks.

Loan interest rates have yet to recover despite loan rate cap being repealed in 2019

4.     Capital remains adequate. CAR decreased slightly from 18.9% in Q2 21 to 18.8% in Q3 21. This remains higher than the 14.5% statutory minimum ratio. The slight decline was mainly on a higher increase in risk-weighted assets on the back of higher loan book growth. The high capital levels, higher earnings and improving asset quality have provided room for the resumption of dividend payout with KCB paying out an interim dividend.

5.     Overall ROE decreased from 22.67% in Q2 21 to 21.97% in Q3 21.

KCB (target price KES54.00) is our top pick in Kenya banks

Our Buy recommendation is based on its:

  1. Sector-leading net interest margin, with cost of funds remaining low.

  2. Earnings performance, which represents an upside risk to our valuation.

  3. Cost efficiency, with management hitting its target of a cost/income ratio of below 45%.

  4. Fee and commission income growth driven by digital channels, especially mobile – as at H1 21, the bank's digital (mobile) income made up 29% of its total fee and commission income.