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KCB Group Plc FY18 Earnings Note

KCB Group Plc (NSE: KCB) released FY18 financial results this morning reporting a 21.8% y/y increase in EPS to KES 7.83 (in line with our expectation of a 20.3% y/y rise to KES 7.73). The performance was attributed to a 50.2% y/y decline in Loan loss provision (LLP) to KES 2.94Bn on account of IFRS 9 day-one write off through capital. Revenue channels were depressed, with Net Interest Income (NII) growing 0.9% y/y to KES 48.83Bn while Non-interest Revenue (NIR) recorded subdued growth (-0.1% y/y) at KES 22.97Bn. Other operating expenses were kept in check (-3.7% y/y) as staff costs regressed 11.2% y/y. The balance sheet grew 10.5% y/y driven by the 7.6% y/y growth in deposits. The loan book rose 7.9% y/y as the bank continued to lend amidst tightened price controls. A total dividend of KES 3.50 was declared, a 16.7% increase from FY17, which translates to a dividend yield of 8.3% against the current market price. We are currently reviewing our banking sector coverage and valuation.

Our View:  We highlight the healthier loan book (6.9% NPL ratio) and the increased operational efficiency (48.7% CTI ratio), though the depressed revenue stream is a concern. Despite this, NIR is expected to recover in 2019 following the one-off EIR adjustment in 2018, while NII is expected to stabilize at current levels as the two key factors that drove it down in 2018 (MPC rate cuts and US Fed rate hikes) are expected to remain mute in 2019. Hence, we view the upcoming revision of provisions in 2019 (cost of risk) as the key risk factor in profitability going forward. Further, the KES 3.5 total dividend payment translates to a dividend yield of 8.3%, which should be very attractive for income investors. We are currently reviewing our banking sector coverage and valuation.