sparkly wrote:lochaz-index wrote:Equity bank KE Q3 results look good on the surface but a bit wobbly below it.
1. In relative terms growth in the loan portfolio has been about 24% YoY for four years (2011-2015). If you compute the growth rate for 2016(by extrapolating till end of the year using current year growth rates) it tanks to less than 1%. In absolute terms, the corresponding four year average has been been circa 39b. For 2016 the same comes to little under 2b.
2. Flight to quality after the belly up stunts of three banks has not helped Equity to shore up its deposit base in 2016 as was the case in 2015. Current year deposit growth is also outpaced by all the previous four years (2011-2014) in relative terms and only beats 2011 & 2012 in absolute numbers.
3. Last I checked the cash reserve ratio was at 5.25%. Has this changed? Coz when I compute Equity KE's CRR for Q3, the figure falls way short of the statutory minimum coming in at 4.29%, or am I missing something? Under what circumstances and for how long are banks allowed to hold less than the stipulated percentage?
4. Equity has been bulking up on its liquidity in the last two quarters. Given the economic conditions, liquidity preference is understandable but the rate of bulking up is a tad startling. This is exemplified by the following:
a). Decreasing increase in the loan portfolio as explained above.
b). Shrinking loan to deposit ratios which is evident in all three 2016 quarters.
c). Decreasing CRR from Q1 all through to Q3.
d). Spike in government securities held for sale. Q3 portfolio is over 4 times the respective Q1 figure and about 1.5 times the Q2 stat.
What is prompting this? Why are they prepping themselves in what appears to be a hurry, any blind corners in the horizon other than the obvious ones?
5. Its capital buffer is thinning out partly explaining its reluctance to lend in the current financial year. A capital injection is due, bear run or no bear run.
6. NIM is falling as a thanks to an anemic economy. This is even before the interest caps take full effect. These twin issues will make life hard/harder for banks to navigate.
7. Lower CTI's have been the saving grace for the most part in 2016. Equitel and automation of tasks will continually reduce the CTI (the target was 42%) in the immediate future. This will be achieved at the expense of employee headcount which started last year. A total of 1060 employees have faced the chopping board in two years.
Was there an official explanation on the jump in letters of credit, guarantees and acceptances figure from 18b in Q2 to 29b in Q3?
Kudos for the analysis. What do you reckon the impact on the bottom line will be?
Given the economic conditions the prudent thing is to expect a reduced bottom line.
This will be realized through:
1. Mark to market losses for its t-bill/bond portfolio once there is an uptick in rates in Q4 2016 and Q1 2017. Notice about 75% of their portfolio is held for sale and a further 80% of it has been acquired in Q2 and Q3 which were largely low yield periods. The huge haircuts will more than negate the increase in interest earned from govt securities.
2. Increasing LLP's as NPL's continue to build up.
3. As for the impact of the interest cap, it is futile to attempt any analysis without a profile of their loan book and details of their deposit accounts. But they will take a hit that's for sure. For example, interest from loans rose by 23% in Q3 2016 vs Q3 2015 despite the fact that the loan book only expanded by about 2.7%. This window has been slammed shut by the caps.
Cost of deposits was rising prior to the rate cap and this will accelerate in the new regime. I await Q4 numbers for more clarity in terms of actual figures/ratios.
Mitigating factors to the above include but are not limited to; cost savings, growth of non-interest income and higher contributions to earnings by non - KE subsidiaries.
For the short term(1-2years) however, those positives will be over run making way for subdued earnings.
The main purpose of the stock market is to make fools of as many people as possible.