Stanbic IBTC Reflates Profit, Maintains Strong Prudential Ratios

Stanbic IBTC Reflates Profit, Maintains Strong Prudential Ratios

Stanbic IBTC Holdings Plc market capitalisation was flattish at ₦488.665 billion on Monday after mixed third quarter earnings results.

The results show that third quarter 2020 earnings was disappointing but overall result for 9-month remained strong.

In the stock market, the group share price closed at ₦44, the highest point it has reached in the last 7-trading sessions.

While lender’s figure for 9-month period remain sturdy, there was significant drop in the third quarter stand performance.

This was largely attributed to unpriced risks brought about by two key events in the financial year 2020.

Analysts however have a feel, pointed that trading income growth and cheap funding cost boosted earnings amidst hostile economic environment.

The Nigerian economy is faced with multiple pressure including the imprinted COVID-19 damages on productivities and then the protests.

Lender’s 9-month 20220 results came with 4% year on year increase in gross earnings to ₦183.286 billion from ₦176.157 billion in the corresponding period in 2019.

In the period, the group reported a 13.1% increase in earnings per share to ₦5.80 in 9M-20.

Chapel Hill Denham said this is in line with its annualised EPS estimate of ₦8.51.

“We maintain our BUY rating on Stanbic while our 12-month target price is under review”, Chapel Hill Denham said.

Expressing opinion on the result, analysts explained that Stanbic IBTC’s non-interest income growth was the key driver of earnings in 9M-20.

The results show that non-interest income accelerated  by 20.2% year on year on account of strong fixed income and currency trading (+63.2%) and asset management fees (+13.0%).

The bank had adjusted its strategy in light of the significant fluctuations in the currency and fixed income yields.

In addition, analysts said Stanbic performance was supported by its wealth management segment (where non-interest income advanced by 12.3% year on year in Q3-20.

“We expect these to remain the drivers of earnings in 2020 as lower rates on investment securities and loans will encourage the bank to seek growth in its other profitable segments”, Chapel Hill Denham said.

However, lender reported an improvement in cost to income ratio in its 9-month 20220 result.

Specifically, the cost-to-income ratio improved by 5.12% to 45.8% in 9M-20, with 10% growth in operating income growth, met by a 10% reduction in operating expenses.

In its view, analysts at Chapel Hill Denham said they expect management to continue exploring creative ways to cut back on operating expenses (with the CBN directing a restriction on staff lay-offs) in 2020 given the expected pressure on interest income and non-interest income from lower yields and cut in transaction charges.

Also, Stanbic IBTC recorded lower interest expense, plunged 20.6% year on year owing to lower market rates and a rebalancing of funding base, as the bank exchanged its more expensive term deposits for cheap retail deposits.

As at 9M-20, savings deposits made up 62% of total deposits, while current and term deposits each accounted for 19%, analysts stated.

Although this resulted in a 2.3% quarter on quarter contraction in customer deposits, analysts believe it will also support lower funding cost in 2020.

Expressing its concerns our concerns Stanbic IBTC result, Chapel Hill Denham noted that lender’s gross loans declined by 1.6% in Q3-20 as against Q2.

This is attributable to a winding down on some corporate loans. This contraction in loan growth, coupled with the pressure on yields, led to a decrease in interest income, nosedived 3.1% quarter on quarter.

“We expect this cautious approach to loan growth to continue and likely weigh down on interest income in 2020”, analysts explained.

It was also discovered the net Impairment charges skyrocketed in the Q3-20, the situation that was attributed to increase in expected loan losses.

This comes on account of the weaker outlook for the oil sector, which accounts for about 30% of Stanbic IBTC loans.

Analysts at Chapel Hill Denham also noted that recoveries recorded in previous years did not extend into this period.

Detail look into the bank unaudited numbers showed a 10% year on year decrease in interest income to ₦81.95 billion.

The reduction in Interest Income comes despite a 19.6% year on year growth in Interest earning assets reflecting the low yield environment.

That means going forward, lenders have to lend more to closed gap in interest earnings income due to low interest rate drive in the economy.

Meanwhile, for third quarter against second quarter, the group interest Income was down 3.1%, though net loans to customers’ surged 6.1% year to date.

CSL Stockbrokers said the period saw 20.6% year on year decline in Stanbic IBTC operating expenses to ₦25.7 billion.

This came despite 40.8% growth in interest bearing liabilities reflecting a significant improvement in funding costs.

Meanwhile, customers’ deposits rose up 17.9% from the beginning of the year to date.

“We highlight the continued improvement in current to savings accounts (CASA) ratio, settled at 81.1% in 9M 2020 as against 71.1% in 2019 and 56.8% in  2018”, CSL Stockbrokers said.

Analysts also expect the bank’s improved deposit mix to also remain supportive of funding costs in a low interest rate environment.

The group’s pre-tax profit jerked up 11.2% year on year to ₦76.9 billion in 9M 2020 but declined 12.6% in the third quarter compare with the second quarter of 2020.

Supported by a lower effective tax rate of 13.9% in 9M 2020 compared with 19.6% in 9M 2019, profit grew higher by 19.1%  to ₦66.2 billion, bringing annualised return on average equities to 26.4% in 9M 2020 compared with 27.9% in 9M 2019.

In a report, CardinalStone said Stanbic IBTC sits comfortable in terms of prudential compliance with more than 100% capital adequacy ratio buffer of 20.7% as against requirement of 10.0%) and liquidity ratio nearly 4 times the regulatory requirement at 117.3%.

In its first half, analysts said NPL ratio may have risen 100 bps to 4.9% in H1’20, but this likely relates to a conservative treatment of assets more susceptible to the pandemic (further reflected in the 7-fold jump in cost of risk to 2.1%).

“To this point, CardinalStone noted the relative quality of credit on boarded pre-COVID-19 as the bank only restructured about 5.1% of its loan book versus an average of 21.0% for our coverage.

The group diversified business model made it relatively less exposed to a material pass-through of COVID-19 weakness on bottom line.

Earnings, in H1’20, were resilient (+24.7%), bolstered by the strong performance of the Corporate and Investment Banking business (CIB).

Improved performances in Personal and Business Banking (PBB), supported by deposit repricing and growth in transaction volumes and activities; and Wealth Management business, backed by AUM growth are likely to buoy H2 numbers.

“We raise our FY’20 earnings forecast by 17.2% to ₦83.1 billion, translating to a jump in forecasted ROE to 25.1% from 21.7% previously”, CardinalStone stated.

Following adjustments to its estimates, CardinalStone also raise 12-month Target Price to ₦51.46 from ₦39.61 which implies a 21.5% upside to our ref price.

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Stanbic IBTC Reflates Profit, Maintains Strong Prudential Ratios