Equity Analysis /

NCBA Group: Q1 19: Higher operating costs weaken earnings; reiterate Hold

    Faith Mwangi
    Faith Mwangi

    Equity Research Analyst, Financials (East Africa)

    Tellimer Research
    7 June 2019
    Published by

    In Q1, NIC Bank recorded a 9.2% yoy decline in EPS to KES1.38, 12% below our expectations. The bank recorded an unexpected 15% yoy increase in operating expenses mainly from a jump in personnel costs. Gross NPLs/net loans ratio ticked up to 14.7% from 11.4% in Q1 18. This led to a 21% yoy jump in loan loss provision charge, which further dampened earnings. The ROE was 10.3% in Q1 19 vs. our 11.7% estimate.

    Reiterate Hold. Our target price remains unchanged at KES34.00 (ETR 18%). The bank is trading at a 2019f PB of 0.5x and a PE of 4.5x. The bank has kicked off the year on a disappointing note and is already falling behind our FY 19 estimates. We see downside to our earnings estimates due to: 1) higher-than-expected costs from additional staff and branches 2) weaker-than-expected asset quality, and 3) higher-than-expected cost of risk, which is likely to rise given the lower asset quality. The bank is in the process of a merger with the CBA Group, a local unlisted entity, in H2 19.

    Asset quality continues to weaken with little chance of recovery. Gross NPLs/net loans ratio rose to 14.7% in Q1 19 from 11.4% in Q1 18. The bank’s asset quality is among the weakest among our Kenya banks universe. NIC Bank has been struggling with weakening asset quality in the corporate segment. With continued minimal spending on the government’s key manufacturing agenda, there’s a dim outlook for the overall corporate segment. Even post the merger with the CBA Group, a similarly corporate-focused bank, we believe the asset quality will remain a pain point even for the new entity.

    Cost/income ratio rises to 47.6% in Q1 19 from 45% in Q1 18. NIC Bank incurred a 14% yoy increase in staff costs. Along with additional branches that opened in 2018, NIC Bank also increased its headcount. One of the conditions in the upcoming merger with the CBA Group is that the merged unit will not retrench staff. As a result, we expect the higher staff costs to remain throughout 2019, putting an upside risk to our cost estimates for the year, from our previous forecast of 7.6% yoy in 2019 with a 7% yoy expected rise in staff costs.