KCB Ltd ( BUY, Ksh 57.00 )
■ Action/Event: KCB announced its Q1:14 late last week with 29% y/y growth in net income to Ksh3.9bn vs. Ksh3bn in Q1:13. On a quarterly basis, net income grew by 11% vs. Ksh3.5bn in Q4:13 on the back of lower cost to income ratio of 49% compared to 56% in Q4:13.
■ Total operating income up 15% y/y on higher non-funded income contribution: Interest income growth of 11%y/y was mainly driven by income from loans 8% y/y and government securities 45% y/y. In fact, KCB’s total government securities book has grown by 61% y/y from Ksh54bn to Ksh87bn in Q1:14. On funding, cost of deposits increased by c.20bps Q4:13/Q1:14 to 2.9% on yearly basis but remained flat y/y. On our calculations, Q1:14 NIM declined by c.50bps to 10% on lower net interest income (-4% q/q) a net result lower interest income (-2%q/q) and higher total interest expense (+10% q/q). Stronger non funded income growth of 19% y/y to Ksh4.8bn led to a 2points increase in its contribution to total operating income from 35% (Q1:13 and Q4:13) to 37% in Q1:14. In our view, the 2x q/q growth in other fees and commissions to Ksh1.7bn is likely the result of KCB groups 41% q/q growth in off balance sheet items from Ksh121bn to Ksh171bn.
■ NPL ratio increases by 120bps to 9.3%: Non-performing loans increased to Ksh20bn mainly due to c.3 corporate names in the construction sector which have been affected by governments delayed payments in the sector. Management’s FY14 NPL ratio target remains 6% and management is confident that the corporate NPLs will unwind by Q3:14. The growth in NPLs has driven additional provisioning of Ksh1.2bn leading to 65% coverage ratio (59% Q4:13), in line with FY14 guidance. Cost of risk increased by 80bps y/y and 30bps q/q.
■ 50bps increase in risk-adjusted profitability: Risk weighted assets grew by 46% y/y on the back of CBK’s new risk prudential guidelines. On our calculations, annualised net profit to average risk weighted assets improved by 50bps q/q to 6.5% in Q1:14. Customer loans and advances registered 10% y/y growth to Ksh233bn however, yield on loans declined by 30bps y/y to 14.4%. Customer deposits grew by 9% y/y and 3% on the quarter where individual deposit account for 29% of total deposits, corporate deposits at 51% and SME contribute 17%. KCB group regional operations contribute 20% of total assets and 10% of profit before tax.
■ Key ratios : Group cost to income ratio improved by 720bps from 56.3% in Q4:13 to 49.1% in Q1:14 as a result of -2% y/y and -15% y/y decline in total operating costs largely due to lower staff costs (-8% y/y and -9% q/q). The bank’s core capital to RWA ratio stands at 18% (15% in Q4:13) based on the new risk prudential guidelines and suggests a healthy capital buffer of 7.5% above the minimum requirement of 10.5%. ROE improved to 24% on a group level compared to c.23% in Q1:13.
■ Valuation : We have a BUY recommendation on KCB with a target price of Ksh57.00. On our numbers, KCB trades on a FY14E P/E of 9x and P/B of 2x. Please refer to the last published note on KCB for detailed company disclosure
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