Barclays Bank Records 19.8 Percent Drop in EPS To KSH 0.32

Barclays Bank recorded a 19.8Percent y/y drop in 1Q17 EPS to 0.32 shillings.

The bank’s Net Interest Income (NII) and Non-Interest Revenue (NIR) were disappointing after declining 7.1 percent y/y and 7.8 percent y/y (respectively). Performance was stabilized by flat cost growth. Overall, performance was below expectation with elevated NPLs remaining a key concern.
The Flat cost growth was at 0.9 percent y/y. Staff costs were up 1.7 percent y/y with other operating costs down 7.9 percent y/y.  Overall, Cost to Income (CTI) was at 55.5 percent, in line with our FY17 expectation of 53.6 percent. Economic experts expect the bank to record significant cost uptick though we expect upward CTI pressure to be mainly from declining income.

Some of the negatives that accompanied the results are:

1. 8 percent y/y drop in NIR. Contrary to our expectations, NIR lines returned poor numbers with fee and commission income down 11.8 percent y/y and other operating income down 55.6 percent (most likely related to one-off income in 1Q16). FOREX income was up 19 percent y/y. With a poor start to the year, we are likely to cut our FY17 growth expectation from 3.5 percent y/y to flat growth.
2. 700 bps q/q cut in Net Interest Margin (NIM) to 9 percent. Balance sheet growth remained flat over the quarter with deposits and loans up 1.9 percent q/q and 0.1 percent q/q (respectively). Similar to other Tier 1 banks, impact on NIM was from declined loan WAIR which settled at 12.1 percent from 12.4 percent in 4Q16 and 13.6 percent in 1Q16. The cost of Funds remained stable q/q at 2.6 percent. In the view of economic experts, 1Q17 numbers across the industry have revealed stiff competition on loan pricing and resulted in unprecedented levels of NIM erosion. Economic experts expect to revise our NIM forecasts downwards to reflect this outcome. Currently, FY17 NIM forecast stands at 9.9 percent which we expect to revise to about 9 percent.
3. NPL still elevated at 6.9 percent.Gross NPLs were up 48.4 percent y/y and 2.1 percent q/q. As at FY16, management had indicated NPLs were mainly from the retail sector. Going forward, management was looking to stiffen their screening process to protect the bank though this is yet to bear fruit. The bank’s NPL ratio was above our FY17 forecast of 6 percent.  Economic experts anticipate revising this upwards unless 2Q17 shows further weakness. We note the bank’s strategy is still aggressive compared to historically with loans as a percent of total assets still high at 64.7 percent compared to historical average of 58.9 percent. Considering the lost market share over the years due to a conservative strategy, we do not expect the bank to revert back to sub-60 percent levels.