Housing Finance Group announced results for the full year ending December 2015, recording an adjusted EPS growth of 22.6% y/y to KES 3.40. The company’s Net Book Value (NBV) recorded a 62.0% y/y growth to KES 30.14 due to the 2015 rights issue and increased retained earnings. Below please find key highlights:
Net Interest Income grew 19.1% y/y to KES 3.6bn in FY15 attributed to improvement in its lending capacity: HF Group undertook a Rights Issue in 2015 that raised KES 3.5Bn seeking to expand its loan book and to secure longer term debt financing. The rights issue and retained earnings aided the company boost its shareholders equity by 62.0%. The yield on interest earning assets increased 155bps y/y to 13.3% in line with the over all stable interest rate environment.
The bank’s cost of funds however, surged 118bps due to increase in its long term borrowings by 8.2% to KES 18.54Bn. This saw its net interest margins increase 38bps at 5.9% from FY14, also attributed to increase in loans and advances by 17.2% to KES 53.02Bn.
Non-Funded income performance recorded a 39.0% improvement. This helped reduce its funded income reliance from 78.3% in 2014 to 75.5% in 2015 attributed to a rise in other operating income and income from forex dealing, recording growth of 67.8% and 236.8% respectively as fee and commission income dropped 6.6% to KES 342.7Mn.
The cost to income ratio increased 536bps y/y to 54.5% due to additional branch expansion to Kisii and Kitengela. This led to a faster rise in operating expenses (+36.8% to KES 2.6Bn), including staff costs (+12.5% to KES 1.1Bn), depreciation and amortization (+8.4% to KES 93.9Mn) and other operating expenses (+69.4%).The bank is in the process of establishing new efficient ways of banking through internet banking and mobile app.
Loans and advances recorded a 17.2% y/y increase to KES 53.0Bn. This was supported by increased capital from the rights issue and growth in customer deposits which recorded a 15.4% growth with retail deposits recording a faster 34.9% growth than corporate deposits which saw a 4.7% growth from FY14 to FY15. The growth in deposits helped support the bank’s loan-to-deposit ratio by 195bps.
With further branch expansion, we expect the bank to increase its deposit mobilization initiatives and increase its lending capacity going forward. The bank’s capital ratios improved with Core capital/TRWA increasing 425bps y/ y to 15.4% and Total capital/TRWA by 303bps to 18.1% both above the statutory minimum of 10.5% and 14.5% respectively. The improved capital position was boosted by its Rights Issue that managed to raise KES 3.5Bn. However, its liquidity ratio declined 272bps y/y to 28.0% compared to the statutory minimum of 20.0%, and below other banks in the industry.
Gross NPLs were down marginally -1.6% y/y to KES 4.1Bn. The bank saw an improved loan book quality with Gross NPL ratio down 125bps to 7.2% which is still higher than the average banking sector NPL Ratio of about 4.3%, underlining a much higher Non Performing Loan portfolio compared to the banking sector average.
Its loan provisions shed 8.6% to KES 503.77Mn in 2015 as its NPL coverage improved 792bps to 23.5% which is still lower than the average banking sector NPL Coverage Ratio of about 40.0%. This still underscores the bank’s low loan provision despite a drop in its Gross NPL. With a more stable interest rate environment, we expect further improvements in its loan book quality as loan repayment improves.
In its vision 2020, the company seeks to open 6 new branches in Hurlingham, Komarok, River Road, Ongata Rongai, Machakos and Nanyuki. This well help support the bank’s presence across the country. Besides branch expansion, it will offer new products in internet banking, mobile app and continue in Phase II of Precious Heights property development besides Theta Grove and Clayworks(1500 units). We expect the bank to further extend its partnerships with County Governments and other real estate property players in its regional expansion initiative across Africa. We expect the bank’s net income to be supported by increased non-funded income from the sale of K Mall located at Komarock and the completion of the Phase One of the Precious Heights project at Riruta undertaken by its subsidiary HFDI. HF Group is currently trading below its net book value (P/B multiple of 0.66x) way below industry median P/B of about 1.42x and therefore issue a overweight recommendation.
Source: Dyer & Blair Research.