DTB Group released Q1 21 results with EPS up just 2% to KES6.97. Earnings were hampered by an increase in loan loss provision charge (+68% yoy), which is unlike the trend in other banks. DTB Group has, however, been a historically conservative bank and we believe the accelerated provision is in line with the management’s strategy. Management has forecast FY 21 cost of risk to remain at similar levels to FY 20 at about 3.0%. Non-interest revenue declined by 2% yoy, but similar to other banks, we expect some recovery in coming quarters following the lifting of the waiver on digital transaction fees.
Loan book growth is expected to be around 3% in FY 21 as management is cautiously optimistic on the economic environment in 2021. We see this as extremely cautious, and the bank may miss out on the increased momentum on private sector credit growth, which hit 6.8% in April.
Net interest margin is expected to remain at 5.2% in FY 21. Fixed deposits account for about 50% of total bank deposits, making it very difficult for the bank to achieve low cost of funds. Most of these funds are from related parties, which also means they offer preferential rates at the detriment of net interest margin. As such, we expect the bank’s net interest margin to remain below peer average.
Cost of risk expected to remain elevated at about 3%. Going by management's history of aggressive provisions, this comes as no surprise.
Fee income expected to recover in 2021 with management keen on enhancing product development for clients.
Cost/income ratio expected to record gradual decline with overhead costs for the bank remaining low.
We retain Hold on DTB Group with a target price of KES154.00
The bank is trading at a current PB of 0.3x and PE of 2.3x. Although the multiples are attractive entry points, the bank is yet to address some key concerns including:
Sustained downward pressure on net interest margin brought on by preferential pricing to associated entities.
Weaker than historical asset quality matched by lower levels of provision coverage. DTB's historical NPL ratio was about 1.5% prior to 2018, which was supported by high write-offs and cautionary lending to specific market segments. Even with the low NPL ratio, management retained a coverage level of above 90%, which made the bank’s risk management one of the best in the industry. As at FY 20, the bank recorded an NPL ratio of 10.3% and NPL coverage of 43.3%. Investors therefore continue to punish the stock for this negative trend in both asset quality and provision.
Development in fee and commission income is slower than peers. Despite having a large retail network, the bank is yet to adequately leverage this to generate strong fee and commission income. As of Q1 21, fee income to total income was 10%, which is much lower than Tier 1 banks average of c20%.
Net interest margin declines to 5.3%, in line with management's expectations
Net interest margin fell to 5.3% in Q1 21 from 5.5% in Q1 20. Management had expected a fall in asset yields in 2021 and expects net interest margin to close FY 21 at 5.2%. Loan yields fell to 9.1% in Q1 21 from 9.6% in Q1 20, with low chances of a rise in yields given the push from the regulator to keep interest rates low. Yields from government securities declined to 9.2% in Q1 21 from 9.7% in Q1 20, in line with the lower interest rate environment.
Gross NPLs increased 38% yoy, matched by higher cost of risk
DTB’s distribution of NPLs is primarily in the trade, real estate and manufacturing segments, which accounted for 50%, 27% and 9%, respectively in FY 20. The majority of these NPLs are concentrated among the top 10, accounting for about 75% of total NPLs as of FY 20. Specific provision coverage was 43% in FY 20. Although the higher loan loss provision charge (+68% yoy) hampers earnings, we agree with management’s strategy of increasing coverage and expect this trend to continue for the rest of the year.
Non-interest revenue declined by 2% yoy but recovery in sight
Fee and commission income declined 21% yoy in Q1 21. The bank had foregone about KES120mn in fees and commission in FY 20 (about 4% of total fee income in FY 20) after the regulator waived fees last year, which we believe is recoverable partially in FY 21. Unlike other local retail banks, DTB’s digital business is mainly in the SME sector for payments, with B2B transactions accounting for 54% of transaction value on mobile platforms and B2C transactions accounting for 21%. The bank is yet to catch up with peers in mastering the retail market for digital transactions.
Cost/income remain lower than industry's at 43.5%
This remains one of the bank's key strengths. Management does not foresee significant costs arising for the bank and expects cost/income ratio to taper downwards in FY 21.