Stanbic IBTC: Analysts Downgrade Estimates, Cut Target Price as Profit Sinks
A slew of equity analysts have downgraded Stanbic IBTC estimates, and cut target price after the financial service boutique reported a more than 50% earnings slump in the first half of the financial year 2021.
The lender’s target price slash came with a line of a downgrade, as quite a very few investment analysts show optimism about the bank’s performance outlook in the second half of the year. Even, the management lower Stanbic IBTC guidance for financial year 2021 due to non-performance in the first half.
Keeping at its historical dividend payment policy, the bank double down on interim dividend for the period at N1 on each share outstanding, from 40 kobo in the first half of financial year 2020.
But analysts insist that the group earnings miss has lower optimism, thus warant reduction in earnings projections given that key performance metrics slumped year on year.
In line with the thought, Stanbic IBTC hinted analysts it has made adjustments to guidance for 2021. The management lower return on equity expectation for the year, expect a return to stay between 15% and 20% compared with last year.
The group also indicate an expectation of a higher cost to income ratio range from 55% to 60% in the year. Now, Vetiva expects gross earnings to print at N190 billion in 2021, from N230 billion previously estimated for the year amidst the ongoing economic recovery.
In its equity report, the investment firm projected that the bank will see a slowdown in operating expenses to N108 billion from an initial estimate of N112 billion.
While the group’s capital adequacy ratio is currently healthy and allows for dividend payouts, analysts at Tellimer said they do not expect the group to repeat its generous payout in 2020 where it paid a total of N4/share and bonus shares -one for every six shares held.
Tellimer forecasts N3.50 dividends per share for the financial year 2021 on outstanding shares. Stanbic IBTC low appetite for lending has seen the bank facing heavy cash reserve debits by the Central Bank, and this has impacted earnings strongly. Also, regulator costs, big earnings cut for the bank in the period as AMCON charge expanded 32% year on year.
It isn’t easy to put a weak performer on buying list, according to analysts that spoke with MarketForces Africa as the third quarter of the year comes to a close a few days.
Before its earnings release, CardinalStone Securities limited has said in the second half of the year report that Stanbic IBTC Holdings would need new outlets for return on equity accretion as analysts set N46.70 as the target price, its reference price was N40.70.
“STANBIC currently models our expectations for our coverage banks, with 50-50 non-interest revenue against net interest margin (NIR/NII) earnings contribution, almost twice the capital adequacy ratio (CAR) requirement, liquidity ratio over 100%, and NPL ratio at 3.6%, below the regulatory requirement”, CardinalStone added.
The investment hinted it sees limited scope for significant earnings growth in the financial year 2021, partly due to a possible slowdown in non-interest revenue and higher operating expenses.
“For us, it is likely that the bank’s capital market business, which has been a mainstay for the bottom line, could be hit by weaker trading revenue due to jump in yields”, it added.
Analysts at CardinalStone forecasted that return on equity would decline in 2021 to 16.5% from the rooftop of 24.4% scored in 2020. In the first half of 2021, Stanbic reported a 26% year on year decline in gross earnings to ₦94 billion. A similar scenario had played in the first quarter as earnings remained depressed due to weaker yield on assets.
The group recorded 7% quarter on quarter growth in interest Income grew to ₦17 billion, but analysts at Vetiva Capital said it was 12% lower for the first half of 2021 period in comparison to 2020.
Investment analysts attribute this to lower income from investment securities, which remained flat quarter on quarter and came in 55% lower year on year. The bank financial shows that interest expense jerked up 20% quarter on quarter to ₦6 billion but was still down 35% year on year at ₦11 billion.
Stanbic IBTC closed the second quarter with a net interest income of ₦17 billion sitting on its financial statement, an increase of 7% when you compare with N15.86 billion reported in the first quarter of the same year. Comparing the first half 2021 record with the equivalent period in 2020, the bank net interest income fell 12% from N37.549 billion to ₦32.879 billion.
However, non-interest revenue (NIR) remained flat between the first quarters of 2021 and the second quarter of the same year at around ₦25 billion. On half year basis, Stanbic IBTC sees a 31% year on year drop from N71.44 billion to ₦49.363 billion.
The bank’s fees and commission income was the only line item to show improvement year on year, Vetiva Capital said in a report. Fees and commissions expanded 22% to ₦45 billion, driven by a 20% year on year increase in Asset Management fees.
Vetiva said the bank continued to report net positive loan loss provisions, printing at ₦1 billion for the first half of 2021 as impairments fell by 76% year on year, while writebacks remained flat.
Due to a steep inflation position, the bank’s operating expenses jumped by 17% year on year to ₦59 billion, driven by a 32% increase in AMCON charges, which have been fully recognized in the first half of the year.
This led to a 53% year on year drop in pretax profit to ₦24 billion while after-tax profit settled at ₦22 billion, 50% lower year on year. This resulted in a slowdown in return on average equity to 12.6% from 27.3% a year ago.
With a bearish outlook, analysts at Vetiva Capital slashed the price target for Stanbic IBTC to N44.14 from N51.04 with the expectation that the bank dividend payout will reduce to N2.50 from N3.38 previously estimated.
Similarly, Tellimer, an emerging market investment firm headquarter in London said in its equity report on the ticket it has cut the 12-month target price to N47 from N53.6, the decision analysts anchored on the pressure from CRR debits on margins.
Tellimer analysts noted the bank asset quality metrics were positive despite earnings breaks, with the NPL ratio down to 3.2% while restructured loans also fell, to 2% of gross loans.
“A bulk of the drag in profits was the result of lower trading revenue, similar to the first quarter of 2021, which fell 89% year on year, down 30% on a quarter-on-quarter basis”
“In its call, management attributed the negative performance to the lower money market and fixed income trading activities during the quarter, limited FX flows -given the challenges with the FX market- and its lower balance of derivatives”, analysts added.
Tellimer noted that trading is a key source of revenue for Stanbic IBTC; it contributed 26% to the financial year 2020 operating income, compared with the average of 19% of the banks in its Nigeria coverage.
Apart from trading revenue, analysts said the group’s net interest income declined 11% due to lower yields on investment securities, partly due to the Central Bank of Nigeria’s (CBN) extremely low-yielding special bills, which are 57% of the group’s total investment securities.
“The CBN’s persistent cash reserve ratio (CRR) debits continued to be a significant constraint on margins, as the group’s effective CRR was 56.4%, the highest in our coverage, and well above the regulatory minimum of 27.5%”.
“We have reduced our medium-term earnings estimates by an average of 36% and our return on equity forecasts by 5.5 percentage points, factoring in lower margins given the unfavourable CBN CRR debits/special bills dynamic and its severe impact on Stanbic IBTC, as well as the increased pressure on the group’s funding costs and liquidity”, Tellimer stated.
For 2021, the investment firm expects Stanbic IBTC to deliver a net attributable profit of N49 billion, compared with its previous expectation of N83 billion.
At the first half earnings call, Stanbic IBTC lower return on equity expectation for the financial year 2021, expect a return to stay between 15% and 20% compared with last year. The group also indicate an expectation of a higher cost to income ratio range from 55% to 60% in the year.
Interestingly, the group expects asset under management (AUM) growth of between 15% and 20%, which, judging by the first half of 202 run rate, appears to be unachievable as Tellimer noted that AUM grew 3% year to date in the first half.
Stanbic IBTC: Analysts Downgrade Estimates, Cut Target Price as Profit Sinks