Under-priced as investors seek up-turn in key strategic elements
DTB Group is trading at a PB of 0.2x, a significant discount to the industry average of 1.0x. This is against an ROE of 9.8x for 9M 21. The discounted levels offer an attractive entry point for investors, but the bank does not attract interest because of:
DTB's relatively weak net interest margin. Although this has always been an issue for the bank due to preferential pricing for its affiliates, it no longer has the above-sector loan book growth it had prior to 2016, which would offset the low margin. Management is targeting loan book growth of 3% yoy in FY 21, with the likelihood that DTB will record similarly low loan book growth in FY 22. There may be some reprieve with the regulator as some other banks have highlighted that they are inching closer to getting their loan pricing models approved. Even so, DTB Group may not benefit as much as local Tier 1 banks as its SME loan book does not attract premium rates.
Its below-average fee income despite the wide retail market. DTB Group has been late to the party in both launching digital channels and monetising them. The bank has a significant retail network and SME market that it could leverage to generate fee income from transactions, but this has yet to be fully developed. Non-interest revenue to total income stands at 25%.
Declining asset quality. Prior to 2017, DTB Group had an average NPL ratio of between 1% and 2%, with a coverage ratio of above 90%, and had one of the highest asset quality levels among Kenyan banks. However, its NPL levels now mirror those of the rest of the sector, with the bank seemingly grappling with resolving some key accounts since 2017. It has been our expectation that management would carry out a write-off on some of these accounts, as has been the historical trend. Management is targeting a cost of risk of 3% in FY 21. Although this may hurt earnings, we consider the ramp up in coverage levels as a positive development for the bank.
Investors will continue to punish the bank until there is an improvement in these three metrics. Even then, DTB retains one of the highest PBT contributions from regional units and one of the lowest cost/income ratios in the Kenyan banking sector. We reiterate our Hold recommendation on the stock.
4% yoy decline in operating expenses. The bank has completed its physical expansion programme and is now expanding regionally by increasing its stake in its current holdings. As such, the bank's expenditure remains low, and we do not foresee significant increases in its cost structure in the medium term. DTB's cost/income ratio remains better than that of its peers, at 46.3% in 9M 21.
Deposit growth was relatively strong at 10% yoy, but the net interest margin remained stable, at 5.2% in Q3 21. This was despite loan book growth remaining flat.
Non-interest revenue decreased 5% yoy. Fee income failed to benefit from the resumption of charges on digital transactions and growth remained flat. This was particularly disappointing given the growth in transactions in Kenya. FX income declined 5% yoy while other income (which we believe is related to trading income) declined 19% yoy.
NPLs increased 43% yoy, which was unexpected given the improvement in asset quality throughout the Kenyan banking sector, especially in H2.