KCB Group released Q1 21 results with PAT up just 2% yoy. The main weakness in earnings was in non-interest income, which declined 20% yoy on account of lower fee and commission income earned by the bank. However, we expect a recovery on account of the lifting of the waiver on fees for digital transactions and increased transaction volumes on digital platforms.
We retain our Buy recommendation on KCB with an unchanged target price of KES54.00
The bank is trading at a current PB of 0.9x, which we believe presents an attractive entry point for investors. KCB is our top pick among Kenyan banks as we believe:
Asset quality is set to improve in the medium term on account of a clean-up of NBK’s loan book and an improved economic environment easing some of the Covid-19 related pressure.
Fee and commission income is set for recovery following the lifting of the waiver on fees on digital transactions. KCB Group has in recent years invested both in the technology and product suite of the digital platforms, allowing for strong growth in digital transactions on the back of a large retail market share. Compared to its peer, Equity Group, KCB Group still has headroom for growth to catch up.
The bank’s loan book growth is set to be supported by the corporate sector, which has so far shown some recovery in 2021.
Fee income weighs down non-interest revenue, but recovery expected
Fee and commission income from non-branch channels declined 35% yoy due to the waiver of fees on digital channels and reduced mobile lending within the period. In our view, we expect fee and commission income to recover in the coming quarters following the reinstatement of fees on digital channels and the retention of increased upper limits on mobile transactions.
It is worth noting that the value of mobile transactions jumped 181% yoy. We expect KCB Group to record increased fee income based on this new higher base of transaction volumes on mobile transactions. Even though the Central Bank retained the fee waiver on bank to e-wallet transactions, KCB Group has a wide product suite and is not as heavily reliant on bank to e-wallet transactions for revenue.
On digital lending, the volume of digital loans fell 28% yoy, mainly on a 51% fall for KCB M-Pesa loans. Going forward, we expect a recovery in digital lending on the back of the improving economic environment.
However, due to cautious lending on the part of the bank, we do not expect growth to be strong, but we do not anticipate a further contraction in digital lending volumes.
NPL ratio at 14.8% in line with industry levels
KCB Group’s NPL ratio was 14.8% in Q1 21, which is similar to industry levels of 14.5% in February 2021. Problem areas remained the corporate sector and SMEs, whose NPL ratios were 19.3% and 13.6% respectively.
Management had mentioned that the bank expects to make some recoveries in 2021 as the effects of the pandemic ease in the country. The management target for the NPL ratio in 2021 is 12.5%, which we believe is achievable if some key recoveries are made. But we expect any such improvement to be from 3Q 21.
Cost of risk at 1.7% was in line with management's FY 21 guidance of 1.8%. With coverage at 65%, we still believe the bank could do with higher provisioning. Similar to Equity Group, management is confident in relying on collateral to make recoveries. With an average loan to value of 75%, management believes the bank is cushioned from the fall in asset prices experienced over the past year.
Subsidiary PBT contribution now at 14%
Subsidiary PBT grew 17% yoy, which brought the subsidiary contribution to 14%. National Bank of Kenya (NBK) PBT grew 24% yoy on slightly lower loan loss provision charges and higher interest income.
Management had mentioned making recovery efforts on NBK’s NPLs, but there has been no improvement given gross NPLs remained relatively flat qoq. Management highlighted that capital of US$30mn had been advanced to NBK in order to boost its capital position.
The bank is keen on enhancing its footprint in Rwanda and Tanzania through the acquisition of Banque Populaire Du Rwanda (BPR) and BancABC. According to management, KCB Group will pay a total of US$56.9mn for the acquisition of 100% of these two entities. The transaction is yet to go through shareholder and regulatory approval.
Net interest margin in line with management target
Net interest margin was 7.4% in Q1 21, a marginal decline from 7.6% in Q1 21. This is in line with management's FY 21 target of 7.4%, which was based on expected low loan yields of 10% and cost of funds of 2.6%.