- Boost in earnings from a 23% decline in expenses related to lower loan loss provision charges, which was expected
- Slight decrease in income (5% qoq) on lower loan yields; KCB is our top pick
- Asset quality to remain weak with the central bank expecting a peak in June 2021
According to data from the Central Bank of Kenya, banking industry PBT increased by 20% yoy in Q1 21. On a qoq basis, PBT increased by 94%. According to the regulator, there was a slight decrease in income (5% qoq), which we believe is largely related to lower loan yields in the quarter. Earnings were boosted by a decrease in expenses by 23% qoq, which we believe was related to lower loan loss provision charges. Overall, the industry ROE was 22.0% in March 2021 compared to 20.4% in March 2020.
KCB is our top pick
We have Buy recommendations on KCB and Equity Group – our top pick is KCB. The bank is one of the four high-quality emerging market banks we identified in our recent research that have failed to fully latch on to the global stock market rally of the past year. KCB's price has only risen by 4% since we published the report. The bank remains our top pick based on:
Fee and commission income recovery in 2021 following the lifting of the ban on digital banking fees. KCB has been recording strong growth in transaction volume, which we believe will be sustained by higher transaction limits on digital channels.
We expect KCB to retain higher-than-peer net interest margins as the bank can support low cost of funds from its recent acquisition of National Bank of Kenya and its wide retail network.
Loan book growth for the bank is likely to be supported by its corporate sector, which had already started to recover prior to the short partial lockdown in April 2021, which only lasted about a month.
KCB's high NPL levels remain a concern. Even though KCB has accelerated provisions, recovery of the bank's NPLs may take up to 2023 as the Covid impact on the economy continues and businesses are expected to withhold investments in the run-up to the general election in 2022.
Credit growth remains low, as expected
Industry loans grew 6% yoy (1.4% qoq). While this may still be relatively low, it is worth noting that the overall private sector credit growth has been improving since Q4 20. According to the latest data from the Central Bank of Kenya, private sector credit growth stood at 9.7% yoy in February compared to 7.7% a year ago. The key drivers of private sector credit growth so far have been consumer durables (+20 yoy growth in February 2020), manufacturing (+16% yoy) and transport and communication (+19% yoy).
Resilient deposit growth supports liquidity
Banking sector deposits grew by 12% yoy (2.8% qoq) in Q1 21, while liquidity levels remain high at 55.7% (February 2021). Banks have mainly opted to invest in government securities as opposed to loans, with the government remaining active on the domestic borrowing front. Lending has remained unattractive due to: 1) The Central Bank of Kenya still dragging its feet on approving loan pricing models; 2) weak asset quality; and 3) overall lower lending opportunities with Covid-19 having led to the closure of a number of businesses.
Asset quality to remain weak; regulator expects peak in June
NPL ratio increased to 14.6% in March 2021 from 12.5% in March 2020 and 14.1% in December 2020. Regulations allowing banks to restructure loans were discontinued at the start of Q2 21. We expect this to result in a mild pick-up in non-performing loans. The regulator expects NPL ratio for the sector to peak in June 2021 at 16% with banks having been given up to June to regularise their loans. Even then, we expect the sector to record lower loan loss provision charges compared to 2020 with earnings expected to rise in the coming quarters.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...