Kestrel Capital Results Note

KCB Bank this afternoon announced 3Q13 results posting a 15.4% y/y rise in PAT to KES 10.8bn. The growth was boosted by a rise in interest income (+11.8% y/y to KES 24.3bn) and supported by non funded income which increased 7.8% y/y to KES 12.4bn. Operating expenses grew much slower than total income at 7.7% y/y to KES 19.5bn resulting in a 250bps reduction in the CTI to 52.1% (excluding restructuring costs). The results beat our expectations where we had estimated an +8.0% y/y rise in EPS. Below are the key earnings drivers:

· Loan book expansion coupled with lower cost of funds drives interest income up-KCB Bank’s loans and advances grew 8.0% y/y to KES 225.7bn (+6.0% y/y rise in 1H13, +5.4% q/q rise) as a result of increased lending to retail, SMEs and corporates during the period. Additionally, a reduction in interest rates as highlighted by the CBR (average of 17.14% in 9M12 compared to an average of 9.00% in 9M13) resulted in the bank’s interest expenses declining faster (-34.3% y/y to KES 6.4bn) than the interest income (-2.4% to KES 30.6bn y/y). As a result, interest income recorded an 11.8% y/y rise to KES 24.3bn (-5.3% q/q). Customer deposits performed poorly, rising 1.6% to KES 301.1bn.

· NIMs ease 440bps to 8.9% y/y-In line with the lower interest rate environment, KCB Bank’s NIMs were under pressure during the period as yields on interest earning assets weakened 660bps y/y to 11.5% while the bank’s cost of funds declined 1340bps y/y to 2.6%.

· Technology driven transactions drive non funded income-Fees and commission income was up 8.8% y/y to KES 7.6bn as a result of increased volumes in technology driven transactions including mobile and internet banking. Forex income, however declined 6.5% y/y to KES 2.7bn probably on account of a relatively stable shilling. Non funded income grew 7.8% y/y to KES 12.4bn accounting for 31.1% of total income from 34.6% in 9M12.

· Cost to income ratio eases 250bps to 52.1%- This was mainly attributable to the bank’s cost management initiatives including leveraging on technology and automation, coupled with interest and non funded income growth. However, the bank incurred a one off restructuring cost which saw the effective CTI rise 80bps y/y to 55.4%.

· NPLs continue to rise-We note a 35.8% y/y rise in gross NPLs to KES 19.7bn with the NPL ratio recorded at 8.4% (+170bps y/y), informed by subdued business environment in 1Q13 and part of 2Q13, as well as implementation of the new prudential guidelines which require a more aggressive recognition of NPLs. Provisioning during the period declined 4.1% y/y to KES 2.0bn despite the uptick in NPLs. The coverage ratio declined 210bps y/y to 44.5% which remains below the 50.0% sector average.

· We remain optimistic about the bank’s ability to deliver strong shareholder returns going forward based on its large network in East Africa and South Sudan (6 countries, 236 branches), leveraging on alternative channels and technology including agency network, mobile and internet banking to grow its operating income and reduce its CTI, thereby improving the bottom line performance. However, the bank’s high NPLs and low provisioning remain a key risk.

· Trading at a P/E and P/B of 10.7x and 2.4x and an ROE of 24.6%, we maintain our BUY recommendation on the counter.

Obiter dictum

KCB Q/Q profits slowed in Q3:-

PBT "Kes. Millions"
Q1 ; 4,263
Q2 ; 5,834
Q3 ; 5,072

Cde Monomotapa wrote:
According to the CBK Q3 'Wikileaks'

PROFITABILITY: The banking sector profit before tax for the quarter ended September 2013 decreased by 6.6 percent from Ksh. 33.2 billion in June 2013 quarter compared to Ksh. 31.0 billion for the quarter ending September 2013. Over the same period, total income stood at Ksh. 88.6 billion being a decrease of 4.1 percent from Ksh. 92.4 billion registered in the second quarter of 2013. The decline was partly attributed to the reduction in lending rates. Whilst total expenses decreased by 2.7 percent from Ksh. 59.2 billion in the June 2013 quarter to Ksh. 57.6 billion in the September 2013 quarter. The reduction in expenses was partly attributed to decline in interest paid on deposits. On an annual basis, the profitability of the sector increased by 14.5 percent to Ksh. 92.5 billion in September 2013 from the Ksh. 80.8 billion registered in September 2012.

http://www.centralbank.g...rdBankingsector2013.pdf

Looks like a U-shaped recovery scenario where increased NPLs (hence provisions) will be glossed over by increasing loan uptake & efficiencies/innovations. Declining rates appear to be the elephant in the room near-term. Especially for Kenya-only banks.

Seems results will be very meritorious this time round. Kaeni rada'.


Precisely. Re: KCB. Next....

Monday morning, 7.30am ... may it do well coz simba has set the bar high ;)

... Cheers Obiero!

Any news? I do not see it online.