Valuation Summary

We are of the view that I&M Holdings Plc is a “BUY” with a target price of Kshs 74.2, representing an upside of 62.0%, from the current price of Kshs 47.4 as of 29th May 2020, inclusive of a dividend yield of 5.4%,

• I&M Holdings Plc is currently trading at a P/TBV of 7x and a P/E of 4.1x vs an industry average of 1.0x and 5.4x, respectively.

Income Statement

• Core earnings per share declined by 29.7% to Kshs 2.0, from Kshs 2.9 in Q1’2019, not in line with our projections of a 2.2% increase to Kshs 2.9. The performance was driven by a 5.7% increase in total operating income, which was weighed down by the 24.5% increase in total operating expenses. The variance in core earnings per share growth against our expectations was largely due to the 5.7% rise in total operating income to Kshs 5.7 bn, from Kshs 5.4 bn in Q1’2019, which was slower than our expectation of an 33.3% rise,
• Total operating income rose by 5.7% to Kshs 5.7 bn, from Kshs 5.4 bn in Q1’2019. This was driven by a 7.4 % increase in Non-Funded Income (NFI) to Kshs 2.2 bn, from Kshs 2.1 bn in Q1’2019, coupled with a 4.6% increase in Net Interest Income (NII) to Kshs 3.5 bn, from Kshs 3.3 bn in Q1’2019,
• Interest income rose by 5.7% to Kshs 6.5 bn, from Kshs 6.1 bn in Q1’2019. This was driven by a 7.2% increase in interest income from Loans and Advances to 5.3 bn from 5.0 bn in Q1’2019, as well as, a 20.8% growth in interest income from placements to Kshs 147.9 mn, from Kshs 122.4 mn in Q1’2019. Interest income from government securities declined by 2.0% to Kshs 1.01 bn from Kshs 1.03 bn in Q1’2019. The yield on interest-earning assets, however, declined to 10.1%, from 11.2% in Q1’2019, largely attributable to a faster 15.1% increase in average interest earning assets as compared to the 5.7% growth in Net Interest Income,
• Interest expense rose by 7.1% to Kshs 3.0 bn, from Kshs 2.8 bn in Q1’2019, following a 58.4% increase in interest expense on placements to Kshs 0.2 bn, from Kshs 0.1 bn in Q1’2019, offsetting the 8.0% decline in interest expense on deposits to Kshs 2.6 bn from Kshs 2.4 bn in Q1’2019. Other Expenses declined by 22.9% to Kshs 0.2 bn, from Kshs 0.3 bn in Q1’2019. Cost of funds declined to 4.7% from 5.0% in Q1’2019, owing to a faster 16.7% increase in interest-bearing liabilities, to Kshs 252.4 bn from Kshs 216.3 bn in Q1’2019 that outpaced the 7.1% growth in interest expense. Net Interest Margin (NIM) on the other hand declined to 5.8%, from 6.6% in Q1’2019 due to the slower 4.6% increase in NII, that was outpaced by the 15.1% increase in average interest-earning assets,
• Non-Funded Income rose by 7.4% to Kshs 2.2 bn, from Kshs 2.1 bn in Q1’2019. The increase was mainly due to a 20.9% increase in fees and commissions on loans to Kshs 470.0 mn from Kshs 388.9 mn in Q1’2019. In addition, other income increased by 7.7% to Kshs 511.0 mn from Kshs 427.4 mn in Q1’2019. Foreign exchange trading income however declined by 9.1% to Kshs 586.6 mn from Kshs 645.3 mn. The revenue mix shifted to 61:39 funded to non-funded income, from 62:38, owing to the faster 7.4% growth in NFI, compared to the 4.6% growth in NII,
• Total operating expenses rose by 24.5% to Kshs 3.0 bn from Kshs 2.4 bn in Q1’2019, largely driven by a 178.4% increase in Loan Loss Provisions (LLP) to Kshs 555.3 mn from Kshs 199.4 mn in Q1’2019, coupled with a 36.0% rise in Staff costs to Kshs 1.2 bn from Kshs 1.1 bn in Q1’2019, and,
• Cost to Income Ratio (CIR), with LLP deteriorated to 52.9%, from 44.9% in Q1’2019. Without LLP, cost to income ratio deteriorated as well to 43.1% from 41.2% in Q1’2019, an indication of reduced efficiency,
• Profit before tax declined by 23.8% to Kshs 2.5 bn, down from Kshs 3.3 bn in Q1’2019. Profit after tax declined by 31.1% to Kshs 1.6 bn in Q1’2020 from Kshs 2.3 bn in Q1’2019, with the effective tax rate increasing to 33.1%, from 27.5% in Q1’2019.

Balance Sheet

• The balance sheet recorded an expansion as total assets grew by 12.1% to Kshs 182.9 bn, from Kshs 168.9 bn in Q1’2019. Growth was supported by a 50.1% increase in placements to Kshs 49.4 bn from Kshs 32.9 bn in Q1’2019, coupled with an 8.3% loan book expansion to Kshs 182.9 bn from Kshs 168.9 bn in Q1’2019. Government securities on the other hand declined by 2.6% to Kshs 54.1 bn from Kshs 55.5 bn in Q1’2019,
• Total liabilities rose by 10.9% to Kshs 273.3 bn, from Kshs 246.5 bn in Q1’2019, driven by a 78.1% increase in placements to Kshs 13.2 bn from Kshs 7.4 bn in Q1’2019, coupled with an 8.8% rise in customer deposits to Kshs 240.7 bn from Kshs 221.2 bn in Q1’2019. Deposits per branch increased by 8.8% to Kshs 3.6 bn from Kshs 3.3 bn in Q1’2019, with the number of branches remaining unchanged at 67 branches. Borrowings increased by 11.2% to Kshs 11.8 bn, from Kshs 10.6 bn in Q1’2019,
• The faster 8.8% growth in deposits as compared to the 8.3% growth in loans led to a decline in the loan to deposit ratio to 76.0% from 76.4% in Q1’2019,
• Gross non-performing loans declined by 6.4% to Kshs 22.2 bn in Q1’2020 from Kshs 23.7 bn in Q1’2018. Consequently, the NPL ratio, thus, improved to 11.3% in Q1’2020 from 13.0% in Q1’2019 as the 6.4% decline in Non-Performing Loans, was outpaced by the 7.3% growth in gross loans. The NPL coverage improved to 58.8% in Q1’2020 from 57.4% in Q1’2019 as general Loan Loss Provisions increased by 28.0% to Kshs 9.0 bn from Kshs 7.1 bn in Q1’2019, despite a 6.4% decline in gross non-performing loans,
• Shareholders’ funds increased by 18.4% to Kshs 59.3 bn in Q1’2020, from Kshs 50.1 bn in Q1’2019, supported by an 18.9% increase in retained earnings to Kshs 34.8 bn, from Kshs 29.3 bn,
• I&M Holdings Plc remains sufficiently capitalized with a core capital to risk-weighted assets ratio of 16.8%, 6.3% points above the statutory requirement. In addition, the total capital to risk-weighted assets ratio came in at 21.1%, exceeding the statutory requirement by 6.6% points. Adjusting for IFRS 9, the core capital to risk-weighted assets stood at 16.9%, while total capital to risk-weighted assets came in at 21.2%,
• The bank currently has a Return on Average Assets (ROaA) of 3.0%, and a Return on Average Equity (ROaE) of 17.5%.

Key Take-Outs:

1. The bank maintained its continued rise in NFI recording a 7.4% growth to Kshs 2.2 bn, from Kshs 2.1 bn in Q1’2019. This resulted in the revenue contribution mix shifting to 61:39 funded to non-funded income, from 62:38, owing to the high growth in NFI that outpaced growth in NII. The NFI contribution to total income rose by 0.6% points to 38.8% from 38.2% in Q1’2019. This is however above the current industry average of 22.8%,
2. The bank’s asset quality improved, with the NPL ratio improving to 11.3%, from 13.0% in Q1’2019. NPL coverage also improved to 58.8%, up from 57.4% in Q1’2019 as the 28.0% rise in general provisions to Kshs 9.0 bn, from Kshs 7.1 bn in Q1’2019, outpaced the 6.4% decline in gross NPL to Kshs 22.2 bn in Q1’2020 from Kshs 23.7 bn in Q1’2019, and,
3. There was a decline in efficiency levels as the cost to income ratio without LLP worsened to 52.9% from 44.9% in Q1’2020. The deterioration was largely attributable to a 178.4% rise in loan loss provision, which depressed the bottom line.

Going forward, the factors that would drive the bank’s growth would be:

1. Non-Funded Income Growth Initiatives – I&M Holdings’ NFI growth is improving as the bank focuses on digital innovation to augment transaction volumes and increase fee income. The bank needs to increase the capacity of its brokerage and advisory businesses to increase income contribution from investment and advisory services, and,
2. Geographical Diversification – The bank has been aggressively expanding into other regions, namely Tanzania, Rwanda, and Uganda. This is expected to drive growth in the near future.

Below is a summary of the bank’s performance: