National Bank 1H17 PAT fell 42.2% to KES 179.82m. Performance was poor with all line items showing weakness.
Interest income declined 34.6%y/y partially on the back of a contracted loan book (-12%y/y) as well as effect of the interest rate capping law.
Overall, net interest income was down 35.5%y/y with the 33%y/y fall in interest expense failing to salvage income. In our view, we expect continued fall in interest income with private sector credit growth remaining weak and banks continuing to unwind interest earning deposits. Non-interest revenue was down 11.3%y/y.
Operating costs showed improvement after declining 4.4% with the bank planning a restructure. Loan loss provisions were disappointingly down 85.5% despite non-performing loans increasing 7.7%y/y.
Overall the bank has the highest non-performing loans ratio at 51.6%. In our view, this remains the key risk for the bank making it an unattractive pick in the sector.
Management has not communicated efforts to revise this downwards and as such we are not confident in seeing lower figures from the bank in the near future.
Additionally, the bank is operating below expected capital ratios at 11.8% for Tier 2 Capital against the required 14.5%. Essentially, the bank is not in a position to shore up its asset book unless more capital is pumped in, making it even more unattractive.
With the upsurge in local participation yesterday, we expect Safaricom Ltd (NSE: SCOM), KCB Group Ltd (NSE: KCB) and East African Breweries Ltd (NSE: EABL) counters to remain propped up. SCOM should make another go for KES 24.00 while EABL may see interest ahead of its financial announcement.