SBG's take on the NBK results...

Half way through the 2013 financial year and National Bank Kenya’s H1:13 results appear to be broadly in line with our FY13 forecasts on an annualised basis (6% ahead of our FY13E numbers). At this point our FY13E forecasts remain unchanged and we maintain our SELL recommendation .

Headline numbers show a weak Q2:13 performance: NBK’s Q2:13 PBT of Ksh307m is 11% below its Q1:13 results but 5% ahead on a y/y basis. Interest expense which increased by 26% q/q to Ksh700m was one of the main reasons for the weak performance. Interestingly, a higher cost of deposits in Q2 was also noted at Equity Bank (+35%q/q) but registered a decline at Barclays Bank (-3%q/q). Net interest income growth was strong at 32%y/y and 14%q/q supported by income from its government securities book. Non-funded income was less upbeat (-31%y/y driven by lower trading and other income). Operating costs registered a marginal increase of 6% y/y and 12% q/q.

NPL’s grow 3.6x on a y/y basis: The banks H1:13 NPL’s stock stood at Ksh4bn vs. Ksh1.1bn in H1:12 with no explanation provided by management. This means that NBK which has a Loans/Deposits ratio of 46% has the highest NPL’s to loans ratio among the companies that we cover based on our analysis, at 15% (8% in FY12) and NPL’s to core capital ratio of 42%. Given its H1:13 loan loss provision of Ksh113m, on our calculations, the banks cost of risk increased by 25bps q/q to 0.95% likely due to SME and mortgage provisioning. With no guidance on asset quality in H2:13, we do not dismiss the possibility of higher provisions than what we factor in our numbers.

Up to c.21% dilution from planned Ksh10bn rights issue: The bank has announced plans to raise Ksh10bn to 1) Pursue loan growth from SME, mortgage and corporate banking segments. 2) Diversify its balance sheet beyond the traditional government book. 3) Open 30 new branches by 2017. If they it were carried out at a 30% discount to today’s closing price, Ksh21.50, we estimate that an additional 664m shares would have to be issued and pro-rata share price would be around Ksh17 per share or 21% below current levels.

TP and rating unchanged : Our FY13E forecasts remain unchanged on the back of this result and we maintain our SELL recommendation TP Ksh23. We prefer NIC Bank (BUY TP Ksh64) and Diamond Trust Bank (BUY TP Ksh192) for tier II names. NBK trades on a FY13E P/E of 5.5x and P/B of 0.5x (our estimates)>.






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