Stanbic IBTC Rated Neutral on Downbeat Earnings Forecast, High CRR
Stanbic IBTC Holdings Plc posted an impressive H1 2020 result underpinned by double-digit growth in the bottom line amidst economic challenges worsen by COVID-19 pandemic.
However, following an indication of possible earnings pressure for the second half of 2020, WSTC Securities handed Stanbic IBTC a hold rating.
Analysts cited that Stanbic IBTC has more than ₦851 billion with Central Bank of Nigeria that is not available for use.
The sterilised fund which is up to 28% of Stanbic IBTC’s total assets is a downside risk to the group earnings outlook in the second half of the year.
In its first half of 2020 result, the group’s earnings grew by 8% year on year driven by 27% growth in non-interest revenue.
WSTC Securities Limited however sets fair value estimate of ₦35.79 on the lender’s stock, representing a downside to current market price.
The hold rating signal that investors with long position in Stanbic IBTC should not sell, while those without position should not buy the stock either.
But on Friday, Stanbic IBTC share price jumped to ₦40 from ₦37.50 being the lowest in the last 7-trading session.
According to the Nigerian Stock Exchange chart, Stanbic IBTC share price maintained trajectory last week.
Operating profit rose by 7% but dragged by a significant year on year increase in credit impairment charges.
However, the cost curtailment strategy by the group yielded result as profit before tax (PBT) advanced by 17%.
Lender’s profit after tax grew markedly by 25% informed by the lower effective tax which WSTC Securities said it is due to change in tax basis for the banking subsidiary.
Overall, EPS for the period stood at ₦3.96k from ₦3.42k in H1 2019.
Analysts at WSTC Securities stated that depressed assets yield weighs on net interest income in the period.
The group’s interest income decreased by 9% from ₦60.78 billion to ₦55.13 billion in H1 2020 due to the depressed assets yield.
WSTC stated that this happened despite the comparative growth in interest earning assets in the period.
Essentially, interest on loans and advances to banks and investment income declined double-digit by 45% and 22%, respectively, despite the surge recorded in the asset base.
“We think that the steep declines were due to the collapsed asset yield informed by the sustained financial repression by the apex bank”, WSTC stated.
Elsewhere, interest expense declined year on year by 18% from ₦21.47bn in H1 2019 to ₦17.58bn in H1 2020 informed by deposit repricing and improved deposit mix by the group.
Specifically, the group’s current to savings accounts (CASA) ratio improved by 930bps to 71% in H1 2020.
Also, WSTC said the group did not rollover expensive term deposits as shown by the steep decline in term deposits from ₦153.98 billion in 2019 to ₦104.63 billion in H1 2020.
As a result, analysts stated that the lender’s cost of funds moderated by 130bps to 2.8% in H1 2020.
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Notwithstanding the steep decline in interest expense, it was not enough to offset the impact in interest income as net interest income fell by 4% from ₦39.31bn in H1 2019 to ₦37.55bn in H1 2020.
Consequently, the net interest margin declined by 170bps to 3% in H1 2020 as lender’s trading revenue supported growth in non-interest revenue.
Stanbic IBTC’s non-interest revenue surged by 27%, driven primarily by the robust growth in trading income.
Trading income advanced by 95% from ₦17.60 billion in H1 2020 to ₦34.26 billion in H1 2020.
WSTC Securities noted that the significant boost in trading income was primarily from fixed income as the group rode the yield curve.
On the other hand, net fee and commission revenue and other income declined by 3% and 62%, respectively.
Lender’s recorded an elevated profit after tax which was on the back of cost optimisation and lower effective tax charge.
Stanbic IBTC report showed that lender’s operating expenses declined by 3%, the declined was however informed by the decrease in other operating expenses line.
While staff cost was flat, operating expenses declined by 5% from ₦30.18 billion in H1 2019 to ₦28.63 billion in H1 2020 due to savings in premises and communication expenses during the period.
As a result, cost-to-income improved from 53% in H1 2019 to 45% in H1 2020.
Consequently, Stanbic IBTC pretax grew by 17% year on year from ₦44.65 billion in H1 2019 to ₦52.41 billion in H1 2020.
Similarly, PAT advanced by 25% from ₦36.25 billion in H1 2019 to ₦45.20 billion in H1 2020 on the strength of a lower effective tax charge.
“We note the impressive growth in the group’s total asset by 61% from ₦1.88 trillion in 2019 to ₦3.02 trillion in H1 2020.
“However, while the group’s assets based grew significantly, core earnings during the period declined save for the gains from trading income”, WSTC Securities noted in its equity note.
WSTC stressed that while the decline in core earnings was not unexpected, given the COVID-19 disruptions amid challenging macroeconomic backdrop, the firm expects the group to leverage growth in its assets base to boost profits in the coming quarters.
Analysts however maintained that regulatory headwinds remain a concern.
WSTC Securities noted that the Stanbic IBTC group has about ₦851.09 billion – translating to about 28% of the group’s total assets – as balances with the CBN, which is not available for use and will continue to drag profitability.
Also, the group’s effective cash reserve ratio stood at 153% as of H1 2020.
Notwithstanding the regulatory headwinds, WSTC said it expects the recent reduction in interest on savings accounts to boost net interest margin going forward.
Overall, the investment firm revised EPS forecast of ₦7.33k for financial year 2020 and a fair value estimate of ₦35.97k on the stock.
WSTC Securities handed hold rating to Stanbic IBTC, while it noted that at the current market price of ₦38.50k (before Friday share price increase), the stock is trading at a forward PE of 5.3x.
Stanbic IBTC Rated Neutral on Downbeat Earnings Forecast, High CRR
