NASI and NSE 20 Decline During the Week

Equities

The market took a pause from recent gains, with NASI and NSE 20 declining by 1.6% and 2.0%, respectively, due to declines in large cap stocks, namely Standard Chartered Bank Kenya, Barclays Bank and Equity Bank, which fell by 8.2%, 4.8%, and 4.8%, respectively. Foreign investors were net sellers in the market for the first time in four weeks. Since the February peak, NASI and NSE 20 are down 15.7% and 19.9%, respectively and 13.8% and 8.1% on a year to date basis, respectively.

This week saw the remaining listed banks release their earnings, with the banks registering mixed results. Standard Chartered Bank Kenya registered a 36.0% y/y decline in profit after tax (PAT) to Kshs 3.8 bn, weighed down by a 51.2% increase in loan loss provisions. Net interest income declined a marginal 0.1% y/y, while non-funded income fell by 31.2% y/y on account of a one off Kshs 1.2 bn gain last year owing to the bank’s sale of property.

The loan book shrunk 6.4% y/y to Kshs 123.2 bn, while deposits grew by 11% y/y to Kshs 163.2 bn, leading to a reduction in the loan to deposit ratio (LDR) to 75.5%, from 89.6% the previous year. Operating expenses rose by 16.4% y/y, leading to an increase in the cost to income ratio (CIR) to 54.1%, from 41.2% the previous year. The overall performance missed our expectations of 10.0% growth, and we are now re-evaluating our long-term growth rate assumption for the bank with a bias to reducing it, and shall be meeting with management this coming week to discuss the bank’s strategy going forward.

I&M Bank and NIC Bank recorded PAT growth of 29.5% and 9.8% to Kshs 3.4 bn and Kshs 2.2 bn, respectively. I&M Bank’s strong performance exceeded our 10% expected growth rate, supported by an increase in non-funded income, which rose by 43.1% y/y, and a strong recovery of operations in Bank One Mauritius, which posted a 52.5% y/y increase in PAT. Net interest income rose by 18.4% on account of a 20.6% y/y growth in loans, while deposits grew 21.9% y/y resulting in a LDR of 95.1%, a 1.0% decline from 96.1% the previous year. Operating expenses rose by 21.2% y/y, raising the CIR to 37.4%, which is still far below the industry average.

With the turnaround in profitability in Mauritius having gained traction, we feel that I&M is well positioned to reap the benefits of its expansion strategy and sustain future growth. NIC Bank’s performance was supported by a 19.8% y/y increase in net interest income, driven by an 18.3% y/y increase in loans and a 12.5% y/y increase in deposits. This resulted in an increase in the LDR to 103%, from 97.9% the previous year, which is being funded from their bond proceeds. Operating expenses rose by 33.2% y/y on account of an increase in the loan loss provisions, resulting in a CIR of 50.7%, from 46.1% the previous year. We retain our view on NIC, as performance was in line with our expected long-term growth rate of 10.0%.

Pan Africa Holdings released their H1’2015 results, registering a decline in PAT by 32.4% y/y to Kshs 263.9 mn, from Kshs 390.7 mn in H1’2014. Gross benefits and claims paid increased 13.3% y/y to Kshs 1.5 bn, while there was a decrease in gross written premiums which fell 6.6% y/y to Kshs 2.5 bn. Performance was weighed down by worsening claims experienced in life business, and unrealized return on equities which posted poor performance. Gateway Insurance, which was acquired during the year, also posted a loss during the period due to low production during the transition period. With the insurance penetration rate for Kenya at 3%, the insurance sector has immense growth opportunity but a lot of education to the public needs to happen to unlock this potential. Pan Africa’s venture into non-life insurance, in addition to its life insurance business, should position the firm to capture the expected growth in the industry in the long-term.

Given the high interest rate environment, which may result in slower economic growth, most listed companies will report stunted earnings growth, as has been reflected across the financial services sector. The weak shilling will also affect the manufacturing sector companies, which rely on imported inputs. With most listed stocks seemingly fairly valued, we remain neutral on equities.

Excerpt from The Cytonn Report