Analysts Cut Stanbic IBTC Estimates, Cite Pressure on Retail Banking
United Capital’s equity research analyst Ayobami Omole has downgraded Stanbic IBTC Plc price target from ₦43.8 per share to ₦41.2, but then maintained buy rating on the ticker.
The buy rating comes after estimate showed that Stanbic IBTC share at ₦36.05 presents 11% upside, though the bank share price rocked to ₦39.10.
By market capitalisation, Stanbic IBTC was valued at ₦420.917 billion having achieved 38% floats, with 11,105,997,568 shares outstanding.
In the first half of 2020, Stanbic IBTC reported a 7.8% year on year expansion in Gross Earnings to ₦126.6 billion.
The lender achieved what United Capital analyst called a decent top-line growth despite pressure on economic activities amid coronavirus pandemic.
Interest income, however, fell 9.3% year on year to ₦55.1 billion due to hesitant asset yields.
More interestingly, profit before tax and profit after tax sustained strong uptrend, expanded 17.4% and 24.7% to ₦52.4 billion and ₦45.2 billion, respectively.
“We review the first half 2020 earnings and adjust expectations”, United Capital stated.
Analysis of Stanbic IBTC financials showed that earnings was strongly supported by 94.6% growth in trading income.
Gross earnings growth was mainly driven by non-interest income which grew by 27.2% to ₦69.8 billion.
Specifically, trading income nearly doubled buoyed by financial market volatility in the first half of 2020, rose 94.6% to ₦34.3 billion.
Meanwhile fees and commission revenue remained mostly stable at ₦36.6 billion amidst economic lockdown in the period.
United Capital stated that clearly, Stanbic IBTC strong presence in the Asset management, Pensions and Capital market space, came in very handy amid volatility in the yield and currency FX market environment.
Interestingly, United Capital analyst said this was driven purely by fixed income and FX trade while equity based activities came in at ₦2 million loss.
For fees, United Capital Omole stated that Asset management fees accounted for 62.0% of fee & commission income, up 12.4% to ₦22.7 billion.
In line with developments in the macro space, interest expense fell 18.1% amid a repricing of deposits. The Central Bank of Nigeria is pushing lower interest rate to stimulate economic growth; and this has impacted funding cost generally.
Expectedly, cost of funds improved from 4.1% to 2.8%. However, for Stanbic IBTC, a faster decline in Asset yield from 12.6% to 10.4% almost offset gains from deposit repricing.
Overall, United Capital analyst explained that the lower cost of funds was not sufficient in cushioning the impact of the lower asset yield.
As such, net interest margin declined to 3.2% from 4.9% in the previous year. Notably, impairment charges rose sharply to ₦6.4 billion from a N0.6 billion write back in the prior year.
United Capital analyst said this is unsurprising given the weak macro environment, just as cost of risk, (COR) came in at 2.2% for the period.
On the other hand, Cost-to-Income ratio slowed to 45.2% as against 53.2% in the first half of 2019
This was supported by a slight decrease in operating expenses (OPEX) line- due to cost savings during the nation-wide lockdown – which printed ₦48.5 billion, down 3.1% year on year.
Piggybacking on cost savings and faster non-interest income growth, lender’s pretax and post- tax profit surged 17.4% and 24.7% to ₦52.4 billion and ₦45.2 billion, respectively.
However, United Capital explained that Stanbic IBTC’s after-tax return on equity (ROE) and return on asset (ROA) declined slightly to 28.3% and 3.8% from 28.5% and 4.2% respectively.
This drop was explained by a stronger equity base and over a 60% growth in total asset.
Despite the economic challenges, lender raised it balance sheet size in the period followed an increased in total liabilities, which was in part driven by uptick in deposits.
Unfortunately, Stanbic was able to push total assets by 61.1% but its sterilized cash with the CBN grew significantly at more than 100%.
Following the pattern, United Capital said the balance sheet of Stanbic IBTC holds interesting highlights from the financial period.
United Capital analyst explained that total asset grew by 61.1% to over ₦3 trillion, interestingly, this was driven by a surge in cash & cash equivalent, deposits and trading liabilities.
With uncertainties in the horizon, total loan and advances was expanded by 8.3% compared to 37.5% jump in total deposits.
Thus, United Capital stated that cash accounts for 36.5% of total asset with ₦820.8 billion sterilized by the CBN as cash reserves.
According to management, effective CRR of the bank exceeded 100% as at June-2020.
United Capital analyst stated that clearly, this speaks to the pressure on asset yields despite a Current & Saving Account (CASA) deposits of 80.4%.
Unsurprisingly, non-performing loan (NPL) ratio also tracked higher to 4.9%, from 3.8% in financial year 2019.
Explaining, United Capital analyst stated that the increase in NPL stems from reclassification of two major loans, in the books of the corporate and investment banking business.
The sectors involved are Oil and Gas downstream as well as construction and real estate sector.
Regardless, of the operating challenges facing the bank, its capital adequacy ratio (CAR) remains strong at 23%, quite higher than regulatory minimum.
Further breakdown of the lender’s financial along its income segments revealed that personal and business banking (PBB) drags other businesses.
Analysing the business segments, the result for the PBB or retail banking, which accounted for 16.4% of Group revenue, was rather disappointing, the segment declared loss after tax of ₦3.2 billion in H1-2020 and a cost to income ratio of over 100%.
In terms of asset quality, the business segment has the highest level of non-performing loans at 7.7%, higher than the regulatory minimum.
On the other hand, the Wealth Business which consisting of Asset management, Pensions, Trusteeship, and Insurance remained impressive, contributing 20.2% to revenue and 35.2% to the total pretax profit of the group.
Non-interest income grew by 12% on account of a 9% growth in assets under management (AUM) despite a reduction in retirement savings account (RSA) management fees.
Also, United Capital detailed that cost to income ratio moderated to 27.8% from 30.6% in the corresponding period.
Meanwhile, the Corporate & investment banking segment (CIB), consisting of global market, corporate and investment banking, was the best performer.
The segment reported that net interest income and non-interest income grew by 12.1% and 61.8% respectively.
According to the group financials, CIB profit before tax grew by 34.9% to ₦36.9 billion, contributing over 70% to PBT.
Commendably, deposit grew by 43.3%, made up of substantial amount of low-cost deposits as CASA ratio increased from 39% in H1-2019 to 62% in H1-2020.
The investment firm stated that the sour spot however is the jump in NPL and impairment charges attributable to the more challenging environment induced by COVID-19, as stated earlier.
Looking ahead, Omole highlighted that lender recently launched Super App, as a key item to watch in the second half of 2020 to improve customer experience.
The Super App is designed to be a One-Stop-Shop for Stanbic IBTC’s wide range of offerings, including Banking, Investing, Pensions, Trading and Insurance.
“We are of the view that the innovation around the mobile App is a strategic move by the Group aggressively drive digitize its core service offerings and improve customer experience”, United Capital analyst said.
Furthermore, the investment firm maintain position that the diversified nature of the Group in Capital market, Pensions, Banking and lately Insurance, places lender in a class of its own.
As such, United Capital estimate performance to sustain the first half 2020 momentum. The firm expect this to be driven by Wealth and CIB divisions.
On year on year basis, the firm stated that trading income is expected to come in well above 2019 levels amid FX and bond market volatility.
It projected this happening even as fee income from the Asset management business continue to absorb pressure on interest income as asset yields weakens.
Analysts also revealed expectation that interest expense would further improve, supported by the CBN’s recent adjustment of savings deposit rate which is positive for lender’s 80% CASA deposits.
Furthermore, United Capital estimates indicated that lender’s net interest margin may see some improvement.
“While short term outlook for the retail business is gloomy, except a drastic action is taken to rationalise segment OPEX, we do not see a major cause for concern due to the overwhelming contribution of the CIB and Wealth businesses”, the firm explained.
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Analysts Cut Stanbic IBTC Estimates, Cite Pressure on Retail Business
