KCB Group posts 86% YOY growth in profits - a firm firing on all cylinders

Paul Russo is doing an incredible job at the helm, after an aweful performance in FY23, KCB Group is leading the industry in earnings across the board. Mr. Russo had such a tough time last year when announcing that KCB wasn't gonna payout a dividend, a lot of fellow investors weren't happy some even selling their holdings. Their stock was in free fall, hitting a low of KES 15.75 in Nov '23. He made some difficult decisions during this period that are paying off, literally, as the firm announced a KES 1.5 dividend payout - totaling KES 4.8B, the largest interim dividend in the firm's history. I bet on them early in the year, when the stock hovered at around KES 21, missed the May peak but thought cashing in in July would be a good idea, 62% in a couple of months - not bad at all. Anyway, let's look at their numbers for HY24.

Before we do, here's what Russo had to say about the results:

We delivered a commendable first half of the year, despite strong headwinds in the operating environment, especially in Kenya, thanks to the goodwill and confidence from our customers and commitment by our staff. We were intentional in working with our customers and stakeholders to support them in navigating the difficult environment

The group’s earnings were off the charts, recording an 86% growth in profits YOY¹ to KES 29.92B. This growth was on the back of strong revenues across the group’s businesses, both funded and non-funded. Strong earnings per share validate the overall growth at KES 18.62, it has almost doubled YOY¹. The balance sheet grew by 6% to KES 1.98T, pretty good numbers for a firm of its size. Once you start working with trillions, then otherwise decent growth might seem insignificant, customer deposits increased by KES ~19B, a 1.2% increase, to KES 1.49T. The bank's efforts to enter new markets are paying dividends as subsidiaries contributed 37.8% to pre-tax profits and account for 34.4% of total assets. Loans and advances are up by KES 67.3B, a 7% increase, to KES 1.032T. Net interest income grew by 35% to KES 61.3B, on the back of improved yields and increased lending to key segments. Non-funded income was up 21% to KES 33.3B, driven primarily by digital banking, FX² trading and contribution from Trust Merchant Bank - their DRC subsidiary.

The bank has some areas that need working on; their NPL ratio is fairly high closing at 18.5% in Q2. This is one of the issues the bank faces—roughly one in every five loans it disburses is a non-performing loan, indicating the risk management team isn't on its A-game. NPL provisions were increased by 20% due to this, the group says it's prioritizing efforts to improve asset quality with various measures in place to reduce the NPL ratio. Operating costs increased by 9% to KES 44.3B. The cost to income ratio improved by 8.5 percentage points - highlighting the firm’s efforts to streamline operations and push for efficiency.
The firm seems to be on every ratings agency's list for downgrades - they got downgraded by both Fitch and Moody's, citing exposure to government debt risk through t-bills and t-bonds. After the national government was downgraded by Moody's, it was only a matter of time before any institution with high exposure to it got downgraded too. Remember my July sell? This was part of the reason why--their downgrade was inevitable in my opinion.

Conclusion

The bank is having a run after an understandably disappointing FY23, they're sure to post amazing returns for FY24. Their subsidiariy TMB has already started pulling its own weight, making significant contributions to the group's revenue - the team that handled the acquisition made a smart choice in selecting TMB. The sale of troubled NBK to Access Bank, will definitely improve the bank's financial health and prop up the stock to its peer Equity's level. A challenge that KCB and other banks are currently facing is loss of profits when they're converting profits for other non-Kenya subsidiaries, since the shilling has strengthened and stabilized. Paul Russo captaining the KCB ship fairly well and he's got the numbers to back it up. NPLs have stood out for me on their financial statement, hoping Mr. Russo can work on this.

Resources

KCB Group HY24 financial statement , KCB Group HY24 press release , KCB Group investor relations

YOY - year over year ↩ ↩²
FX - foreign exchange ↩

NOTE : These are personal opinions and aren't shared by the firm, our shareholders and/or associates

Conclusion

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Resources

Footnotes