KCB Group Bounces Back From 20.1% Drop In 1H23

By Soko Directory Team / Published November 24, 2023 | 12:50 pm



KCB

KCB Group Plc released 3Q23 results yesterday, marking a 1.7%y/y slide in EPS to KES 9.31 with net income coming in at KES 29.9bn.

Positively, the results reflect an improvement from the 20.1%y/y decline noted in 1H23. The recovery came on the back of a 21.6%y/y growth in net interest income (NII) to KES 74.9bn coupled with a 38.8%y/y climb in non-interest revenue (NIR) to KES 42.4bn.

NII was buttressed by a 39.1%y/y rise in interest income from loans and advances to KES 81.9bn. Remarkably, the lender posted a 264%y/y surge in digital lending to KES 609bn. We note that this reflects the reduction in consumers’ disposable income amidst tough economic conditions as customers take up the emergency facilities.

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NII was also lifted by a 22.8%y/y uptick in government annuity income. Notably, yields on loans rose by 48bps to 11.4% while those on government securities inched up 27bps to 12.2%. This is the second highest yield on government securities after Co-op Bank – we believe the rising government securities yields result from investing in the short end of the yield curve.

The bank appears to receive a 2% trade finance fee due to the government-to-government oil deal. The lender invests income from the sale of fuel in 91-day T-bills to prevent any losses that may occur from the weakening of the shilling, ahead of the maturity of the dollar-denominated letters of credit.

Management notes that the bank has no exposure to any FX losses. Subsequently, service fees grew 20% to KES 20bn also supported by trade finance income from DRC. As a result, NIR as a percentage of total income rose to 36.1% from 33.2% in 3Q22.

Assets reached a significant milestone, surpassing KES 2Tn mainly on the G to G oil trade finance-related deposits and the TMB acquisition (13.3% of total assets).

Operating expenses before impairments (OPEX) jumped 46.3%y/y to KES 60.8bn, largely as a result of the one-off costs of voluntary early retirement (about KES 2bn), National Bank of Kenya (NBK) litigation loss (KES 2.3bn) and introduction of a new core banking system.

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Stripping out the exceptional costs, OPEX grew by just 6%y/y, potentially resulting in a 31.8%y/y net profit growth. Efficiency gains should begin to be witnessed in FY24 in the absence of these costs. No interim dividend was announced.

Key Positives

  1. Robust top-line growth, up 27.3%y/y to KES 117.3bn, nearly surpassing that of FY22. We estimate that it will close higher by approximately 19.3%y/y by FY23.
  2. The profitability of subsidiaries was impressive too. All subsidiaries save for the Kenyan units posted jumps in net income, posting double-digit top-line growth. KCB Tanzania +157%, Uganda +129%, South Sudan +79%, Rwanda +22%, Burundi +5%. In particular, TMB was an important contributor to group liquidity.

Key Negatives

  1. Net interest margins (NIMs) continue to fall, down 160bps to 6.3% as the Kenyan units continued to face higher financing costs. In addition, capital ratios remain thin though the bank is set to receive tier 2 capital of about USD 100m by 1Q23, which may further strain margins.
  2. Cost to income (CTI) rose 6.7 percentage points to 51.9% on the aforementioned one-off costs.
  3. Absolute NPLs still on the rise – up 25.3% to KES 187.0bn from KES 149.3bn in 3Q22 on deteriorations in the manufacturing, real estate, personal, and trade loan books. Overall Group NPL ratio tapered down to 16.1% from 17.8% in 3Q22 on strong growth in the denominator (assets). The real estate NPL ratio seems to have deteriorated the most, down to 20.8% from 12.8% in 3Q22, though the corporate book remains the most challenging for the lender.
  4. Asset size may decline significantly in the future when the government-to-government oil importation deal concludes, likely in FY25, as competition amongst banks for OMCs resumes. Management mentioned that KCB had a 42% market share in the prior means of importing fuel (open tender system).

Outlook and Recommendation

Manufacturing, building construction, and energy contributions to the loan book grew, with manufacturing posting the highest growth y/y of 2.7 percentage points.

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This illustrates the bank’s commitment to boosting the value of transactions through value-addition initiatives, further aligning with government plans of boosting exports.

DRC revenues remain robust, accounting for about 25% of KCB Kenya’s revenues in the first nine months of inclusion, signaling its huge potential to enhance profitability. Formation of a Group treasury division as well as the Group asset recovery team should enhance efficiency within the bank while ensuring that losses are minimized.

Absolute NPLs should keep ticking up in our view given the higher for longer interest rates sentiments which should continue to cause strain on borrowers up until 4Q24.

The bank is trading at a trailing 0.33x P/B (tangible) and a trailing P/E ratio of 1.66x – a significant discount to the industry’s 0.6x P/B and 3.4x P/E. The counter is trading at a 45.0% P/B discount.

Having lost 44.6% in the past 12 months, the stock has underperformed both the NASI (-28.2%) and the NSE 20 (-9.1%) indices. We maintain our BUY recommendation with an upside potential of 95.4%.

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About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system.Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

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