Equity Analysis /

Kenya Commercial Bank: Strong Q1 results; reiterate Buy

    Faith Mwangi
    Faith Mwangi

    Equity Research Analyst, Financials (East Africa)

    Tellimer Research
    24 May 2019
    Published by

    KCB Group’s EPS rose by 11.4% yoy to KES1.88 in Q1 19, 8% stronger than expected. KCB notably recorded much improved asset quality in the quarter, with its NPL ratio falling to 7.7%, mainly due to a better-performing corporate segment. Cost growth was also muted, at 2% yoy, with the bank seeing benefits from voluntary staff retirements. Overall, Q1 ROE was 19.8%, better than the expected 18.3%. 

    We retain KCB as a Buy and our top pick, with an unchanged target price of KES54.00 and an ETR of 46%. KCB trades at 2019f PB of 0.9x and PE of 5.3x. Given the bank is still delivering 19.8% ROE, we see the multiples as attractive. The only risk facing KCB is the impending National Bank of Kenya (NBK) transaction – the bank is purchasing NBK with a share swap of 1 KCB share for every 10 NBK shares. This will result in a slight dilution of c5% to KCB shareholders. Our key concerns are that NBK struggles with asset quality, poor corporate management and high costs. These are likely to initially reverse the gains that KCB has made through its transformation programme. On the positive side, KCB will be able to access the bulk of NBK’s government transaction business and deposits, and will be able to offload key NBK assets to cushion the cost impact. With its expertise, KCB will able to create higher ROA from NBK’s assets. 

    NPL ratio fell to 7.7% in Q1 19 from 9.8% in Q1 18. KCB has continued to close some court cases this year, which we had expected to result in asset quality improvement. The cost of risk rose to 1.0%, in line with both our target and the management target. We expect the NPL ratio to close 2019 at 7.5%, versus management’s 7.0% target. Management is still pursuing higher loan book growth in a weak economic environment. 

    Net interest margin still above local banks’ average, at 8.3%. With falling interest rates on government securities, KCB has been more open to lending, with loan book growth at 11% yoy in Q1. Deposit growth was also 11% yoy, mostly from low-cost funding, which resulted in a 60bps fall in the cost of funds. Management noted that the NBK transaction is set to give it access to cheaper deposits from government institutions. We believe this will serve to cement the advantage that KCB already has.