Equity Bank released their 3Q18 results this morning before market open; EPS increased by 7.7% y/y to KES 4.17, marginally below analyst expectations of KES 4.29.

Key Highlights

  • PAT  increased by 7.7% y/y to KES 15.7bn – marginally below expectations.
  • Total Operating Income increased by 1.1% y/y to KES 49.3bn – in line with expectations.

What Stood Out

  • Strong loan growth to KES 288.4bn, +8.6% y/y, from KES 265.4bn in 3Q17. This is interesting because you are now starting to see the impact of subsidiary loan growth playing in. The Kenyan subsidiary increased loans by c. 5% y/y.
  • NPL numbers continue to remain elevated at 8.7% – +30bps q/q. Coverage however is maintained at 65.4% (total coverage). This has declined significantly from the >100% coverage seen at the start of the year, on a similar basis – suggesting a cost of risk increase is likely. Of specific note, specific coverage (CBK basis) stands at 38.9%, much lower than the 50.3% recorded in FY17. We think loan loss provisions will increase by end of year.
  • Subsidiary growth continues to remain strong – with double digit growth in deposits and assets in DRC, Uganda, and S. Sudan.
  • Costs were higher than expected – with operating expenses (excl. loan loss provisions) increasing to KES 25.6bn (+1.7% y/y).

Impact on Investment Thesis

  • At a current price of KES 39.50, we think Equity Bank is fairly valued. Our valuation may go up as we do additional analysis on the potential size of the subsidiaries. We are concerned about NPLs, noting that CBK coverage is low – even as compared to FY17. We think Cost of Risk may go up towards the end of year.
  • For now analysts’ recommendation on the stock is HOLD.

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