CBA does the heavy lifting as recently merged NCBA announces 3Q19 resultsNovember 23, 2019
NAIROBI, Kenya, Nov 23 – NIC Group and CBA banks have released 3Q19 results separately for the last time; following the merger which took effect on 30 September, 2019.
Analysts at Standard Investment bank (SIB) have combined the numbers to get a sense of how the combined entity, NCBA, would look like once the transaction is effectively consummated.
Already, the amalgamation of the Kenyan bank operations has been completed while that of subsidiary businesses is expected to be complete by 31 March. 2020. Overall, the Kenyan business performed well for both NIC and CBA, with subsidiaries somewhat weighing down the group on the overall performance.
NIC 3Q19 profits notched up just 0.2% year on year, +62.6%q/q; CBA profits climbed 37.1% year on year, +94.8% quarter on quarter.
Included under exceptional items for both entities was pre-merger costs; Sh344 million for NIC and Sh330 million for CBA for the nine months period to 30 September, 2019 making a total of Sh674 million for the combined entity. In an unexpected move, NIC has declared an interim Dividend Per Share of Sh 0.25, this is in addition to the 1st Half 2019 Dividend Per Share of Sh0.25.
Calculations made by SIB researchers, for the profits of the merged entity, NCBA, suggest that diluted 3rd Quarter 2019 Earnings Per Share would have come in at Sh5.15, a commendable +17.3% year on year growth.
The SIB analysis said: “While both lenders posted a 15.2% year on year growth in operating income, non-funded income for CBA did the heavy lifting to deliver a solid performance. Other fees and commissions for CBA surged 91.2% year on year to Sh2.6 billion suggesting robust numbers from its flagship mobile-linked products, M-Shwari and Fuliza.”
Both banks witnessed an Non-Performing Loan deterioration; CBA recorded an Non-Performing Loan ratio of 10.4%, an increase from 9.7% recorded in a similar period in 2018, while NIC recorded an Non-Performing Loan ratio of 14.6%, an increase from 13.3% in 3Q18.
Looking ahead, SIB said, “We expect the merged entity (NCBA) to shrink its cost of funding in the mid to long term as the now Tier 1 lender expands its retail business – low cost of funding has been the Achilles heel for NIC Bank being a Tier 2 bank (WAIR on deposits averaged 4.8%).”
“With a liquidity ratio of 53.3% for CBA and 49.7% for NIC, the combined entity is well placed to take advantage of lending activities post rate cap, compared to some of its peers in Tier 1 – consequently boosting net interest margin. M-Shwari and Fuliza will continue driving growth in non-funded income,” said the researchers.
“Higher capital expenditure is expected in coming years with expansion, while higher OPEX is expected to be sustained over the coming year to support post-merger branding activities,” expained the analysis.
The SIB researchers said: “While our estimated Full Year 2019 Return on Equity of 14.5% lags most other Tier 1 banks, we see improvements in coming years depending on efficiencies that can be eventually delivered and wider margins. We also see a slight increase in dividend payout – blended payout improves from 20% to about 25% in our estimate, with CBA being the catalyst for a higher payout.”
“Based on our Full Year 2019 forecasts, we expect Earnings Per Share to come in at Sh6.86, which when combined with a dividend payout of 25% results to a yield of 5% and a raft of other margin and profit improvements, we see a potential upside of at least 35% on the current price,” the SIB anaysis said,
SIB concludes that overall, the ongoing merger transaction (assuming all businesses remain as they are), has been accretive to NIC Group shareholders on earnings by 10-15%.