NIC Bank’s H1 19 EPS declined by 4% yoy to KES 2.70. For Q2 19, the EPS declined by 9% yoy to KES 1.38, which was 17% lower than our expectations. The variance was due to the inclusion of pre-merger related costs ahead of the CBA Group and NIC Bank merger in H2 19. Excluding this cost, EPS was up by 21% yoy for Q2 19, which was 5% above our expectations. NIC recorded a 40% yoy jump in non-interest revenue in Q2 19, likely related to trading income from government securities. Fees and commission income saw strong growth at 32% yoy. The bank’s Tanzania unit recorded a loss following accelerated loan loss provisions charge. Q2 19 ROE was 10.5% versus our estimate of 12.6%.
We retain our Hold recommendation. Our target price remains unchanged at KES 34.00 (ETR 27%). The bank is trading at a 2019f PB of 0.5x and PE of 4.2x. Even with the attractive upside on the bank, earnings have so far underperformed our expectations on a cumulative basis. Unlike Tier 1 banks, NIC Bank margins are unlikely to remain stable given low loan book growth and large corporate clientele. Additionally, on cost growth, the bank is still investing in branches to increase its coverage, something that the sector has moved away from. On its digital platform, the bank is unlikely to attract high earnings from alternative channels due to the low market share in the retail segment. We expect the merger with CBA, set to be complete in H2 19, to boost the bank’s position in the retail customer base and improve its ability to lock in large corporates from a larger balance sheet size.
Asset quality remains a concern with NPL ratio at 15.3%. This is up from 14.7% in Q1 19 and above our FY 19 forecast of 10.1%. The bank’s main client base is in the corporate space, which continues to suffer from slow payments from both government and the private sector. We do not expect reprieve on non-performing loans as the government remains keen on cutting expenditure for the foreseeable future. NIC Bank now sits on coverage levels of 26%, which is the lowest in our local covered universe. We expect the bank to raise its cost of risk to improve coverage levels and hence, our cost of risk estimates of 1.5% for 2019 is low.