NMB recorded a 36% yoy decline in Q1 EPS to TZS40.41, which was 46% below our expectations. The key drag on performance was an increase in cost of risk to 4.5% from 2.5% in Q1 18. Considering that asset quality improved, with NPL ratio declining to 6.1% from 6.7% in Q1 18, we believe the aggressive cost of risk was aimed at increasing coverage levels. Net interest margin fell by 40bps yoy to 11.4% on lower loan yields and higher funding costs. The ROE was 9.2% versus our 17.2% estimate.
We reiterate Hold on NMB. Our target price remains unchanged at TZS2,440 (ETR 10%). The bank is trading at a 2019f PB of 1.2x, a significant premium to CRDB’s 0.3x. Based on Q1 numbers, there is a likely downside to our forecasts, given weaker-than-expected margins and asset quality. Despite this, compared with CRDB, NMB is still better in terms of asset quality, cost management, internal capital generation, technology adaptation and client mix (NMB has more high-yielding retail clients and lower exposure to the NPL-prone agriculture sector).
Margins fall despite strong loan book growth. NMB’s loan book grew by 15% yoy in Q1. Loan yields fell on account of easing monetary policy in Tanzania. Deposits grew by 11% yoy leading to higher cost of funds. Over the last six months, yields on short-term government securities have been increasing, leading to pressure on cost of funds in the market. We see a significant downside risk to our 12.3% net interest margin forecast for 2019, given the regulator’s commitment to continue lowering interest rates.
Asset quality continues to improve, NPL ratio now at 6.1%. Like CRDB, NMB’s asset quality improved on the back of regulation changes requiring write-offs and write-backs to be completed sooner. The overall age of NPLs for banks in Tanzania is now well below one year, with the regulator encouraging write-offs. Unlike CRDB, NMB opted to boost coverage by increasing the cost of risk to 4.5% from 2.5%. With NPL still higher than our 2019 forecast of 4.9%, we expect cost of risk to remain elevated throughout the year to maintain the bank’s superior coverage.