Banks’ Earnings

👋 Welcome to the Baobab Weekly by Mwango Capital, a newsletter that brings you a succinct summary of key capital markets and business news items from East Africa.
This week,we cover Kenyan banks’ 2021 earnings and the Kenyan corporate bond market.

First off, our weekly business news in memes brought to you by M-Tiba:

StanChart’s 81% DPR

Highlights: Total operating income grew 6.4% to KES 29M – translating to a 70.3% jump in profit before tax. The jump in PBT was as a result of a 46% reduction in loan loss provisioning, a uniform theme across FY 2021 banking results in what is a confirmation of banks moving from the pandemic.

Return to Dividends: StanChart paid out a dividend of KES 19 per share against KES 23.49 earning per share, translating to an 81% dividend payout ratio. This is the highest payout ratio among the listed banks that have released their earnings so far.

Absa Pays Dividend

Overview: The loan book grew 12% as loans to customers reached KES 234.3B. Net income jumped 161% to KES 10.9B with KES 5.9B of this to paid as dividends. This translates to a DPS of KES 1.10 [2020: KES 0]. Provisioning for loan losses reduced 48% with the loan to deposit ratio at 87%.

KCB Wary of Asset Quality

Milestones: KCB Group crossed the KES 100B revenue mark by registering KES 108B in total operating income – a 13.5% increase from 2020. This translated to a 74% growth in net income as the bank reduced provisioning by 52%. Further, it surpassed the KES 1T asset-base mark to register KES 1.1T in assets, a 15.3% growth.

Foreign Market Plays: KCB completed the acquisition of BPR [Banque Populaire du Rwanda] on 31 July 2021 and is looking to amalgamate it with its Rwandan unit – KCB Bank Rwanda, to form a single banking business. KCB is also mulling entry to DRC by making an acquisition play for an undisclosed bank. Kenya’s largest lender by market cap and asset base Equity Bank has a presence in DRC through its 2020 acquisition of a majority stake in BCDC to form Equity BCDC. 

Asset Quality: KCB’s stock of gross non-performing loans grew by 27% in 2021 to reach KES 122.8B [18% of the loan book], the highest among listed banks that have reported their results so far. The stock of NPLs has doubled from 2019 as the pandemic roiled construction, hospitality. and manufacturing sectors of the economy rendering loans to those sectors non-performing. These are among the sectors in which KCB has heavy exposure.

Lackluster Dividend: While KCB will pay the highest amount in total dividends [KES 9.6B], the payout ratio [28.2%] is the least among banks that released their results this week.

“Given what is going on in the world today, geopolitical issues, Covid, elections coming up this year, and a big growth agenda both organically and inorganically; we felt KES 3 in total payout per share was a good balance to give returns to the shareholders while at the same time protecting ourselves and giving ourselves that sound springboard to fund our growth.”

KCB CFO Lawrence Kimathi

Cooperative’s Strong Dividend Record

Highlight: PAT came in 54.8% higher than in 2020 on the back of a 9% growth in total operating income. While the DPS has remained flat from last year’s KES 1.00, the payout ratio has reduced to 35% compared to the 50% in 2020.

Cash Preservation: Given that the bank was among those that issued dividends last year – a period when other industry players preserved cash citing the economic environment – for investors, there was the expectation that this year’s results would even see a higher payout ratio given the net profit margin for both 2020 and 2021 remained constant at 27%. 

Mwango Capital’s Take-Away:

Striking a Balance: For banks, the operating and net income margins for FY 2021 are off the charts given the reduced provisioning and return to normalcy after suppressed growth due to the pandemic. However, it remains to be seen how receding COVID-related risks square off with the impact of upcoming general elections on the operating environment this year.

Non-Funded Income: Growth of non-interest income was muted across banks – a theme partly occasioned by the suspension of mobile to bank transfers as part of financial interventions against the Covid pandemic. Last week, Equity Bank asked the regulator to reinstate bank charges on bank to mobile transfers. Reinstatement of the fees will have an impact on banks’ non-funded income given the extent of bank-to-mobile transfers in Kenya.

Risk-Based Lending: After Equity Bank got approval to price credit to customers according to their risk levels, KCB CEO said that the bank could get approval this coming week. As Tier 1 banks get risk-based lending approval, there will be a shift in loan book composition and growth as banks price in all borrowers according to their risk levels. We will keep an eye on the impact of risk-based lending on private sector credit growth.

More Results in the Coming Week

Equity Bank and DTB are expected to release their results on Tuesday and Thursday respectively.

Kenya Corporate Bond Market

KMRC Lists its Corporate Bond: Kenya Mortgage Refinance company on Monday listed its bond at the NSE, effectively commencing trading in the secondary market. The instrument being the first corporate issuance for 2022. The Medium Term Note is the first of three tranches and was oversubscribed by 400% on issuance in the primary market.

“This is a major milestone not only for the Company but for the Exchange as well, given its unique structure and the target sector it will support. It is also the first issuance for the year 2022.”

NSE Chairman Mr. Kiprono Kittony

KCB in Plans to Float Green Instrument: In an earnings call interview with Julians Amboko, KCB CFO noted that there are plans to make an entry to the corporate market by floating a green bond.

“We have been looking at a green bond locally. We are still at very formative stages of that conversation, speaking to advisers just to understand what would be the market appetite, at what rate the market will expect a green bond from an entity like ours to pitch at, and then we take the decision. It is something we are looking at. If we go to the market, it will not be anything below $100M. That would be the bare minimum.”

KCB CFO Lawrence Kimathi

Impact: A successful green bond launch by KCB will contribute to what is a recovering trend in the corporate bond market. It will also highlight climate sustainability as a theme in the industry as the bank is set to invest the proceeds in sustainable investments.

Rejuvenating Market?: KMRC’s bond is the fifth corporate instrument to be issued over the last two years. Other companies that have issued corporate bonds include Acorn, Centum, Family Bank, and EABL. With the performance of these corporate bonds in the recent past in the primary market, all indications point to investors yearning for such-like instruments and investment opportunities.

What Else Happened This Week?

🇰🇪 World Bank’s $750M Loan: The Bretton Woods institution this week approved a $750M Development Policy Operation package for fiscal support and enhancing Kenya’s economic recovery from the COVID-19 pandemic [World Bank].

💰 M-Pesa Spin-Off?: In a submission to lawmakers, the CBK Governor Dr. Patrick Njoroge noted that the move would help ring-fence the mobile money business from operations of the wider telecoms business. This comes barely a week after MTN Group announced it will spin off its Mobile Money business (MoMo) into a fully-fledged independent African fintech unit.

🧯Carbacid-BOC Deal Halted: Carbacid noted that objections filed at the Capital Markets Tribunal and High Court by two BOCK Shareholders are standing in the way of its take-over bid of 100% ordinary shares of BOC Gases [Mwango Capital].

🤝 KRA-Keroche Pact: The two parties entered into a tax payment plan that will see the brewer pay an undisputed tax amount of KES 957M over 24 months starting January 2022 [Business Daily].

⛽ Fuel Prices Up: EPRA reviewed fuel retail prices with super petrol and diesel going up by KES 5 and kerosene prices remaining unchanged [EPRA].

🏦 CBK Tap Sale: CBK reopened three bonds seeking a cumulative KES 31.5B. Total bids received came in at KES 24.8B and with CBK accepting KES 23.8B at rates ranging between 11.997% and 13.973% [CBK].

🇪🇹 Ethio Telecoms Partial Privatization Halted: In an announcement on Friday, Ethiopia’s Ministry of Finance said it had halted the 40% stake sale in the telecoms firm and postponed the process to an unspecified timeline citing a fluid macro-economic situation locally and globally [Ministry of Finance – Ethiopia].

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