Kenya: Sector – Tier II Banks
Contrasting growth stories
29 November 2013
Strong Q3:13 drives our 6% average upgrade on FY13E EPS: FY 2013 quarterly performances on an absolute basis have been the strongest to date for both banks. CFC’s PAT grew by 24% y/y to Ksh1.1bn, driven by growth in its AFS book and trading income despite lower other income. NIC’s results benefitted from a 41% ease in cost of deposits and 17% y/y growth in non-interest income despite a 3 point jump in its cost to income ratio. On a run-rate basis, CFC was 4% ahead of our forecasts while NIC was in line. Our forecast changes are informed by a rebalancing of NOI to total income at both banks, stronger-than-expected balance sheet growth at CFC and lower loan loss provision assumption, based on the run-rate to date. As a result, we upgrade our FY13E EPS by +7% to Ksh11.34 for CFC and by 4.4% to Ksh7.44 for NIC.
Potential capital pressure on NIC: With a current core capital to RWA ratio of 14.4%, NIC has not implemented the new risk prudential guidelines. On our calculations, NIC’s CAR could drop to 11%, only 50 bps above the new minimum, if we assume a 24% jump in RWA (in line with CFC), which to us implies the need for additional capital. To achieve a 5% buffer above the regulatory minimum of 10.5%, NIC would need to raise c.Ksh4.4bn, which would imply a 14% dilution on 92m new shares if we assume a 20% discount on a Ksh60 share price on our estimates. Given that all banks are required to have complied by close of FY13, we factor in the dilution into our valuation.
NPL flag at NIC: NIC stands out with NPLs increasing by Ksh1.2bn in Q3:13 vs. Q2:13, +47%, and only a 30 bps quarterly increase in cost of risk to 1.3%. In an environment where systemic NPLs seem to have peaked, at least on the quarter, NIC’s doubling of its stock of NPLs y/y and +47% q/q is a concern to us. We double our FY13E loan loss provision and increase FY14E by 63%, informed by the Q3:13 jump in NPLs and provision levels to date. On our calculations, CFC reduced its cost of risk by c.70 bps on the quarter despite a 7% q/q increase in NPLs. Though we recognise the lower credit loss ratio and NPL growth, we remain conservative in our forecasts and factor in a Q4:13E provision level 1.6x the average of the past 3 quarters.
Ratings unchanged, new target prices: Our forecast changes and capital call assumption at NIC move our TP to Ksh71 (previously Ksh68) and maintain our BUY recommendation. At CFC, our 7% upgrade to FY13E EPS, driven by stronger non-interest income to earnings, moves our target price to Ksh94 (previously Ksh80) and maintains our HOLD rating on the stock. We accept market perception that these banks have the most comparable business models in the tier II space and growth is one of the main attractions in both cases. At this stage we think that much of the growth at CFC is priced in. At NIC, despite potential capital strain and our reservation on asset quality, we believe it still has much to offer. CFC trades on a FY14E P/E of 6.7x and P/B of 1.3x, while NIC Bank trades on a P/E 6.3x and P/B 1.4x.
Too long, I have posted here:https://groups.google.com/forum/#!topic/wazua/PZF-_pVMwyg
Timely advice is as lovely as golden apples in a silver basket. Proverbs 25:11