Non-Funded Income Continues To Spur Performance For CBZ

CBZ Holdings (CBZH) reported a surprisingly decent set of results for the full year ended 31 December 2017 despite several constraints such as cash shortages, forex shortages and a transitioning economy.

The Group navigated these challenges by migrating customers to digital platforms, pursuing structured trade finance solutions as well as coming up with new strategies to support business development in the informal and SME sectors.

The Group also diversified into the properties sector as they reactivated this SBU through CBZ Properties and are involved in a number of property and infrastructure development initiatives in both residential and commercial segments.

The business recorded a 7.4% contraction in net interest income for the period, down from $81.6mn in FY16 to $75.6mnn in FY17. This was as a result of a 15.6% drop in interest income to $158.9mn despite interest expenses dropping by 22.3% y/y.

The bank has been on a drive to grow nonfunded income through different initiatives and this has started to bear fruit. Non-funded income contributed 52.2% to total income, up from a contribution of 43.4% in the prior comparable period.

The Insurance business recently launched the CBZ Life Employee Benefits as well as the Hospital Cash Plan. Net underwriting income of $8.1mn, 2.8% lower than $8.3mn in FY16 was recorded, mainly from existing products.

Total income for the period, therefore, came in at $175.0mn, 10.1% higher y/y, and 11.5% above our forecast, and this was attributed to the 28.0% increase in fee and commission income at $72.3mn from $56.5mn.

Operating expenses were contained as they grew a marginal 1.1% to $111.9mn from $110.6mn  in FY16. This translated to a cost to income ratio of 63.9% for FY17 down from 69.6% in FY16.

Impairments were up 81.4% during the period to $36.0mn from $19.8mn as a result of the dry spell that occurred which
prompted management to impaired loans in the agri sector.

The bank’s appetite for Treasury Bills continued to grow, despite a slowdown in the rate of growth. Treasury Bills amounted to $899.9mn, up from $760.5mn in FY16. Loans and advances, however, retreated 6.5% y/y to $941.4mn, down from $1,007.2mnn and lower
than our forecast of an 8.1% growth.

Due to the loan base shrinking as well as a difficult economic environment for the most part of FY17 which resulted in a 59% increase in NPLs ($112.1mn in FY17 vs. $70.6mn in FY16), the NPL ratio closed the period at 11.0%, up from 6.6% in FY16. Deposits were 4.3%
higher y/y at $1,853.7mn in FY17 vs. $1,777.2mn in FY16 yielding a loan to deposit ratio of 50.8% down from 56.7%, which we believe is very low for a bank this size.

The group declared a final dividend of $0.51 implying a 7.9 times cover. Targeted recovery in loan book, continued growth in Non-interest income.

The stated strategy for FY18 will be on growing the loan book as the Group has forecast a 19.7% growth in the asset. Management indicated that they are looking at growing their exposure in the mining sector (currently 1% of loan book), particularly in chrome, lithium and gold looking at both greenfield and brownfield projects.

Infrastructure will also be an area of focus as the Group is looking into housing, student accommodation and renewable energy. Management has also highlighted that they would be lending money to export generating businesses in an attempt to increase their nostro balances.

Management has set a target of a 31.0% increase in total income hinged on non-funded income, insurance income following the launch of Employee Benefits as well as an anticipated growth in interest income following an expected increase the loan book. We are a bit more conservative as we have forecast total income of $187.4mn, up 7.1% based on the Group’s past performance.

We have forecast net interest income to grow by 6.2% y/y to $80.3m, coming off a low base while we expect non-funded income to increase by 8.0% and underwriting income to register a 5.0% increase.

We believe the bank will maintain a marginal opex growth as we have forecast opex of $112.9mn, up from $111.9mn. According to management, impairments for FY18 are expected to be lower, as they expect the economic environment to be a bit more positive during the year.

As mentioned before, the Group has forecast a 19.7% growth in the loan book. We have, however, forecast the loan book to grow by 9.2% y/y as we do believe that the lending opportunities will not be as promising as management expect, particularly, when finding quality borro

CBZH forecast for deposits to grow by 4.6% during the period, as we expect CBZ to maintain its deposit growth momentum. We expect NIMs to have been around 6.6% in FY17, flat from the same figure in FY16, however, we expect this to increase
to around 6.8% in FY18. CBZ’s dividend policy is for dividends to grow by 10% annually.

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