This research report was prepared by the Research Department of Old Mutual Securities Limited. Old Mutual Securities Limited is a securities trading company licensed by the Capital Markets Authority (Kenya) for the purpose of facilitating trade on the Nairobi Securities Exchange.

Key highlights:
  • We note 14.1%y/y growth in interest income thanks to 24.6% growth in loans and advances. Interest expense rose by 33.6%y/y on expensive funding resulting from increased competition. Overall, net interest income rose by 9%y/y to KES 35.9b.
  • Continued Asset growth: we note a significant growth (+25.5%y/y) in assets which is way above our estimates. Its loan book grew by 24.6%y/y above management’s target (by 3.6%) and our target (by 2.7%). This resulted from aggressive marketing, new products, convenient & innovative delivery channels as well as partnerships with Telco companies. The bank is well capitalised thus we forecast a 4yr CAGR of 14.5% and 18.5% in assets and loans respectively to FY 17e.
  • Non-Funded income growth: we note the impressive growth (+28.7%y/y) on NFI to KES 22.0b, accounting for 37.9% of the total income. This contribution looks healthy amid the rising competition within the sector. Moreover, with the bank’s anticipated growth in both the agency and mobile banking, we believe this remains the key driver on NFI where we forecast a 4yr CAGR of 8.8% to FY17e.
  • Improving cost efficiency: the bank’s CTI ratio stood at 58.9% due to higher provisioning for its South Sudan subsidiary. However, CTI less provisions stood at 50.2%. We remain optimistic on the bank’s ability to contain its operating costs, where we forecast an improved cost to income ratio of 54.4% by FY17e from the current 58.9% in FY 14.
  • NPLs: the book quality improved significantly to 2.3% from 4.5% in FY13. The bank witnessed increased non-performing loans in FY 13 driven by the then looming South Sudan crisis and delayed payment of contractors by the government. However, as the South Sudan tensions cools off and with the government having paid its contractors, we expect NPL’s to maintain at low levels.
  • Regional Expansion: The bank is keen to consolidate its regional business in a bid to scale its profitability. Currently, the bank has operations in Kenya, Tanzania, Uganda, Rwanda, Burundi, and South Sudan. It has 242 branches, 962 ATMs and 9,238 Agents.
  • Valuation: Our model (excess return on equity) suggests a fair value of KES 60.61/share vis-à-vis the current price of KES 59.50/share.
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