Why NCBA has reset growth plans to last quarter of 2020

NCBA Group #ticker:NCBA recently announced the first pre-tax profit of Sh2.4 billion for the first quarter as a merged entity. Managing director John Gachora spoke to the Business Daily about, among others, the impact of the Covid-19 pandemic disruptions on the bank’s business, the decision to pull dividend and the key plans for performance this year.

DURING THE RELEASE OF THE Q1 RESULTS, YOU MAINTAINED THAT NCBA HAD A STRONG QUARTER DESPITE COVID-19 PANDEMIC. WHAT DO YOU ATTRIBUTE THIS TO?

The fundamentals that supported growth in the first quarter of the year did not change. The impact of the Covid-19 pandemic on business performance was felt towards the end of the quarter, that is the last two weeks of March. This is when we saw reduced transaction volumes and credit demand. I believe the full impact of Covid-19 will be felt in quarter two onwards.

THE GROUP ANNOUNCED THE FIRST PRE-TAX PROFIT OF SH2.4 BILLION FOR THE FIRST QUARTER AS A MERGED ENTITY. WHAT ARE THE KEY PLANS FOR PERFORMANCE THIS YEAR WHILE ENSURING YOU TAKE ON COMPETITION LOCALLY AND IN THE REGION?

We have identified five key priorities this year that will guide our growth, including growing our retail footprint and deepening our sweet spots in corporate banking and asset finance. We remain the leader in asset finance and large local corporates. We will also invest in financing the public sector and enhance digital experience for all customer segments.

Our focus is also on developing and sustaining a strong universal brand that resonates best in class customer experience while investing in people to create a highly productive culture.

WHAT ARE SOME OF THE CAPITAL AND LIQUIDITY BUFFERS THAT NCBA BANK HAS PUT IN PLACE TO WITHSTAND THIS PERIOD?

The bank remains well positioned from a capital and liquidity perspective. The capital and liquidity conservation measures we have been taking include cancelling cash dividend, increasing deposits and maintaining a high liquidity of 55 percent across the network. These measures will enable the bank emerge stronger post-Covid-19.

YOU HAD PROPOSED TO PAY DIVIDENDS BUT LATER SHELVED THIS. WHAT DOES THIS MEAN IN TERMS OF YOUR OUTLOOK FOR THE BUSINESS IN THIS COVID-19 ENVIRONMENT?

The board considered the events that have taken place since the financial results were published and the dividend payment recommendation made, in particular the unprecedented Covid-19 pandemic and its devastating effects to the world and Kenyan economy. This led to a reconsideration of the board’s decision as to the type of return to offer to shareholders in order to preserve the Group’s capital and make more cash available to support its customers’ businesses and the economy. Hence the decision to replace the earlier announced recommendation for a cash dividend with a new recommendation for bonus shares. We hold our positon that the economy will take at least two quarters for recovery to begin and we have had to relook at the business to ensure we survive this tide.

THE COVID-19 CRISIS FOUND YOU AT THE TAIL END OF INTEGRATION OF YOUR SUBSIDIARIES OUTSIDE KENYA. WHAT’S THE UPDATE ON THIS?

The planned integration in the other jurisdictions where NCBA Group has a presence is ongoing and is expected to be completed by the close of the third quarter. We initially expected to conclude the process in the second quarter of this year but the effects of Covid-19 have changed our timelines.

YOU TEMPORARILY SHUT SOME BRANCHES IN KENYA AS COVID-19 SLOWED DOWN BUSINESS.HOW ARE YOU UTILISING STAFF WHO WERE SERVING IN THESE BRANCHES? HOW SOON DO YOU EXPECT TO REOPEN?

At the end of March, we made the decision to temporarily close eight of our branches where we did not expect heavy footfall during the Covid-19 period. These branches are either co-located with or in close proximity to an alternative branch.

The staff of these branches have been integrated into our shift staff across our branch network. The staff from these branches formed one of those teams and have been called upon to serve in branches in respective shifts. We continue to encourage the use of alternative channels such as online and mobile banking during this time. We are continually evaluating our branch operations in light of Covid-19

YOU HAD PLANNED TO OPEN 15 BRANCHES THIS YEAR. IS THIS STILL FEASIBLE IN THE CURRENT ECONOMIC SITUATION?

Our plan to open 15 branches is being evaluated on a daily basis as new information is obtained. We are optimistic that the economy will begin to see some recovery towards the last quarter of the year. We might not open all the planned branches but NCBA has an ambition to increase its footprint across the country as part of its growth strategy.

YOU HINTED ON CONSIDERATIONS TO READJUST THE 95 PERCENT OF ASSET FINANCING PLAN AS THE BUSINESS SEGMENT REMAIN AFFECTED DURING THIS PERIOD. HOW MUCH WILL THE BANK BE FINANCING NOW?

Since the pandemic began, we have restructured loans worth over Sh30 billion, offering relief to thousands of our customers.

A majority of these loans are asset financing. For that reason, we are reviewing each application on its merit and for most people the 95 percent loan to value ratio is no longer feasible.

HOW DO YOU PLAN TO COMPENSATE FOR THIS; TO MAINTAIN THE BANK’S BUSINESS GROWTH?

Business responds to the environment and the current environment calls for abundance of caution. Post-Covid-19, we shall make necessary adjustments. For now, the focus is to support our existing customers to survive the storm.

FROM WHERE YOU SIT, WHAT IS YOUR TAKE ON THE MARKET IN LINE WITH DEMAND FOR CREDIT?

Demand for credit has reduced due to lower economic activity in the country. At the moment, many companies are on survival mode. We are assisting many businesses restructure their loans to cope with the adverse effects of Covid-19. We expect demand to increase towards the last quarter of 2020.

BY HOW MUCH DO YOU EXPECT YOUR NPLS TO GROW IN THE NEXT QUARTERS?

The Group has reported an increase in levels of non-performing loans especially in the transport and manufacturing sectors and on the mobile loan portfolio. We have taken proactive steps to increase impairment coverage through an increase in provisions. NPLs remain a major issue from legacy accounts for which we continue to provide. We expect that the impairments seen in the digital business will normalise during the second quarter. However, we expect that the overall NPL ratio will continue to be impacted negatively by the ongoing challenges in the market caused by the pandemic.

WHAT IS THE OUTLOOK FOR THE COMING QUARTERS UNDER CURRENT MARKET CONDITIONS?

NCBA is projecting the country’s GDP to decelerate sharply to 2.3 percent in 2020, should the Covid-19 pandemic persist through the second quarter.

Recent fiscal measures are likely to cushion businesses but unlikely to spur demand in the period under review. NCBA projects businesses to enhance savings more than boost capacity.

NCBA sees sustained interruptions in import deliveries due to prolonged plant shut down in China and supply chain bottlenecks causing immense market dislocations and economic pain. The manufacturing sector may improve with slower imports. However, deteriorating export markets present a bigger risk given the likely slow pace of recovery and the difficulties in sourcing for alternative markets.

Businesses must be ready to adjust their operating models for the new reality. Some businesses may never reopen. Others will reopen under a very different set-up. But opportunities to acquire assets, disrupt markets and manufacture at home will be abundant.

HOW IS THE DIGITAL BUSINESS DOING, HAVE YOU SEEN INCREASED DEMAND?

Digital business accounts for about 10 percent of the bank’s loan book or approximately Sh20 billion.

In the first three months of this year, NCBA digital business disbursed Sh100 billion of loans compared with Sh70 billion a year ago, after introducing Fuliza, in partnership with Safaricom #ticker:SCOM.