NMB released Q1 20 results with EPS rising 130% yoy to TZS97.03. The strong performance was boosted by a 2% yoy decline in operating costs, 24% yoy jump in non-interest revenue and 42% yoy drop in loan loss provision. NMB has embarked on a cost reduction plan with management keen to leverage technology to minimise the cost of expansion. Although the bank is still opening new branches to cover some unbanked segments in the market, it is so far managing to do so with less additional staff costs.
Non-interest revenue was boosted by a 30% yoy jump in fees and commission income, helped both by an increase in loans issued and the increased use of alternative channels. Other non-interest revenue income jumped 89% yoy on the back of trading income. Cost of risk was 2.3% compared to 3.1% in Q1 19; we believe this will rise in coming quarters as asset quality is expected to weaken further on Covid-19 impact. Also, NPL ratio increased to 7.0% in Q1 20 from 5.3% in 2019.
The bank is trading at a PB of 1.2x and ROE of 19.6%. Given the escalating Covid-19 crisis in the country (509 cases), we are concerned about Tanzania’s economic outlook and thereby downgrade our recommendation to Sell from Hold (TP unchanged at TZS2,440) despite the strong Q1 20 earnings.
- Unlike Kenya and Rwanda, which have implemented policy changes in the financial sector to deal with the Covid-19 impact, Tanzania is dragging its feet on active policy changes.
- We expect fees and commission income growth to remain strong from the continued increase in products available to clients on alternative channels and increase in chargeable transactions.
- We expect costs to remain in line with inflation, with the key expenditure coming from technology upgrades. We expect the ongoing expansion to focus on smaller branches in satellite towns, which will require minimal additional expenditure.
- Due to Covid-19, we expect balance sheet growth to be anaemic. NMB is heavily focused in the retail sector where the ability to take up credit will be severely impacted in the coming months.
- 24% yoy jump in non-interest revenue. More than 85% of transactions in the bank are now taking place on alternative channels. Relative to Kenya banks, NMB still has a long way in creating additional products to drive higher transaction numbers. In our view, we expect fees and commission income to continue to grow as the bank continues to increase its alternative channel product suite.
- 2% yoy decline in operating costs. In the last two years, NMB has been scaling down on operating costs as management focused on leveraging alternative channels. We expect the bank to maintain its low operating costs with the only expenditure coming from technology, as staff costs are set to grow in line with inflation.
- NPL ratio increased to 7.0% from 6.1% in Q1 19. This is set to further increase in coming quarters from the Covid-19 impact.
- Net interest margin remained flat at 11.4%. Despite the 15% yoy growth in loan book, the bank achieved lower loan yields in line with lower interest rates in the overall market in Tanzania.