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.
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.
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.
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.
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%.