Earnings Report /

CRDB: Poor results in light of weak balance sheet growth; downgrade to Sell

  • 16% yoy rise in operating costs weighs on earnings, with little chance of a reprieve on the horizon

  • Increase in retail loan book aided in higher net interest margin, positive

  • NPL ratio declines to 5.2%, but asset quality improvement will be short-lived given Covid-19

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
13 May 2020
Published byTellimer Research

Tanzania's CRDB has released its Q1 20 numbers, with EPS up by just 6%. Operating income grew by 11% yoy, boosted by a higher net interest margin following an increase in loan yields and a lower cost of funds. Non-interest revenue increased by 9% yoy, with fee income, mainly driven by alternative channel transactions, growing by 11% yoy. Operating costs, CRDB's Achilles' heel, grew by 16% yoy. 

The past seven years have seen CRDB focus on physical expansion, with the bank having to contend with some loss-making branches. Moreover, its clientele, for the most part, are corporates, who are more expensive to service than retail customers. 

The bank has been embarking on a new strategy since 2018, focusing on digital transformation. In our view, though, management will need to concentrate more on operational efficiency to lower its troublesome cost/income ratio. Thus far, this does not seem to be being achieved. Balance sheet growth in the quarter was minimal, with loans growing by 3% yoy and deposits declining by 2% yoy. We expect anemic balance sheet growth to characterise 2020 in light of the pandemic. 

Compared with the Q1 19 numbers, the bank is trading at a PB of 0.4x and an ROE of 14.5%. We remain concerned about CRDB’s ability to rein in costs and lower liquidity, which limit its ability to lend. Given Covid-19, we expect much weaker asset quality. Based on this and the strong YTD price performance (+58% YTD), we downgrade CRDB to a Sell (with an unchanged target price of TZS155) from a Buy.


  1. Unlike Kenya and Rwanda, which have implemented policy changes in the financial sector to deal with the impact of Covid-19, Tanzania is dragging its feet.
  2. Cost management remains a concern and lowering the cost/income ratio will rely heavily on the bank’s ability to leverage its alternative channels. 
  3. The bank’s higher margins are likely to be sustained as retail loans now account for 59% of the loan book. However, these loans are the most vulnerable to job losses and reduced income opportunities as businesses struggle on account of Covid-19.

Key positives:

  1. Higher net interest margin of 10.6% from 10.0% in Q1 20. CRDB over the past two years has focused on increasing its retail loan book, which now accounts for 60% of the total, in order to grow its margins. The bank now has room to negotiate higher interest rates for loans (corporate clients are relatively inflexible). 
  2. NPL ratio declined to 5.2% from 5.5% in Q1 19. This was helped by write-offs made in the preceding quarter, following the directive from the regulator to write off loans after one year. The NPL ratio, however, is unlikely to remain low – we expect much weaker asset quality in the current quarter. 

Key negatives

  1. Operating costs grew 16%. Management is keen to lower the cost/income ratio from the currently high 63.5% level. However, we are concerned that internal operational inefficiency is hampering this plan, with the bank yet to record significant cost-reduction benefits after the completion of its aggressive expansion strategy in 2018.