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.
- 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.
- Cost management remains a concern and lowering the cost/income ratio will rely heavily on the bank’s ability to leverage its alternative channels.
- 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.
- 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).
- 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.
- 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.