Breaking Down The Numbers From NCBA’s Financial Results

NCBA released its 3Q23 results, recording a 14.4%y/y rise in EPS to KES 8.89 with net income coming in at KES 14.6bn.  The performance comes on the back of an 11.7%y/y growth in net interest income (NII) to KES 26.0bn.

Meanwhile, non-funded income (NIR) sustained its decline, down 8.0%y/y to KES 20.7bn attributable to a 34.3%y/y slowdown in foreign exchange (FX) income as margins on FX transactions started to dip following improvement in the FX market.

However, liquidity in the FX market still shows signs of weakness as mentioned by some peer banks.

Non-funded income drop should be sustained by the full year due to base effects – we expect FY23 FX income to drop by over 28.3%y/y. NIR as a percentage of total income dropped 4.8 percentage points to 44.4% from 49.2% in the prior year.

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Notably, fees and commissions on loans growth was marginal, up only 3.4%y/y likely following a slowdown in digital lending income (M-Shwari and Fuliza) weighed down by the impact of the 50% discounts instituted on Fuliza disbursements last year as well as reduced lending allocation on the platform.

As of 1H23, the lender had noted that digital disbursements had slowed 5%y/y. NIR was supported by a 36.3%y/y climb in other fees and commissions, likely pointing to growing customer numbers as the bank continues to open more branches.

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NII was buoyed by a 29.4%y/y growth in income from loans and advances to KES 25.9bn as the lender repriced loans coupled with a 16.0%y/y swell in the loan book to KES 308.7bn.

In addition, a 9.7%y/y uptick in income from government annuities to KES 20.0bn also boosted the top line. The lender’s government securities portfolio eased 0.8%y/y to KES 231.6bn as the bank likely booked some mark-to-market gains.

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Key Positives

1. Net interest margins maintained a position of relative strength, up 0.1 percentage points despite the 67 bps rise in cost of funds to 4.9%.
2. The bank is signaling asset quality improvement with its forward-looking projections – loan loss provisions were down 27.1%y/y to KES 6.1bn despite a marginal 0.3 percentage point rise in Gross NPLs to 12.9%. As a result, the cost of risk declined 1.6 percentage points to 2.8% from 4.4% as the lender also ramps up asset recoveries.
3. Return on average equity (ROaE) was up 134bps to 22.8%.

Key Negatives

1. Cost to income (CTI) deteriorated 673bps to 47.2% on a 30.5%y/y rise in staff costs and an 18.9%y/y rise in other costs – as the lender sustained branch expansion and hiring.
2. Mark-to-market losses on government securities continue to climb, up 13.5% to KES 3.3bn (26.3% of net income).
3. We note that the lender may face some pressure in the coming year as some government agencies implement the treasury single account directive and as some of its bulk government parastatal loans are bought off by competitors.

Outlook and Recommendation

NCBA announced its proposed acquisition of AIG insurance (from the current 33.33% stake to 100%) in 3Q23, mirroring Equity Group Holdings (EGH) which received its general insurance license in May 2023.

With a 15.9% return on average equity (ROaE) as at FY22, AIG is doing much better than other listed peers who averaged 6.5%. We believe the transaction will cost about KES 2bn.

This move reiterates our earlier view that banks will be looking for other avenues to reduce their reliance on interest income and look to boost their NIR.

The bank plans to leverage its Loop platform as a payment platform in all the countries it operates in, in a bid to improve deposits and NIR.

The focus will continue to be placed on expanding the retail business through branch expansion (sales centers) and digital enhancement – this should enable the bank to access cheaper deposits and bring down its cost of funds – CASA ratio from new branches at about 79:21 – while increasing presence.

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The wealth management business remains robust, having a market share of 17.4% (no. 2 under collective investment schemes) with assets under management of 30.7bn as of 1H23.

We believe the lender will cut its total dividend due to various investment/ recapitalization initiatives to about KES 3.79 which equates to a total dividend yield of 10.0% at the current price.

The lender plans to recapitalize the Rwanda business following thin capital headroom which was just about 1.1% over minimum statutory ratios as of 1H23.

We like the bank’s solid dividend policy (35-50%), robust and growing wealth management business, potentially improving asset quality, enhanced technology products, and insurance continental expansion.

NCBA Bank is now trading at a trailing 0.78x P/B (tangible) and trailing P/E ratio of 4.02x – a premium to the banking industry’s 0.6x P/B and 3.5x P/E.

Having gained 16.0% in the past 12 months, the stock has outperformed the NASI (-27.5%) and NSE 20 (-8.6%) indices. We reiterate that we like the counter as a dividend stock.

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