Stanbic IBTC: Decent results, earnings boosted by non-interest income and provision reversal

Stanbic’s Q1 20 net profit came in at NGN20.6mn (up 8% yoy). Pre-provision profit rose 19% yoy to NGN26.3bn. The key drivers of this performance were higher non-interest income (up 21% yoy), mostly attributable to a 47% increase in trading income gains and lower operating expenses (down 1% yoy) as the bank recorded a NGN3.1bn reversal of a provision charge for legal fees and fines. Relative to our other covered banks whose Q1 20 reports have been released, Stanbic performed considerably better than Access, GTB and UBA (median profit growth of 1% over the period) but below FBNH (PAT was up 61% yoy due to significant trading income gains and recoveries on written off loans). Annualised ROE was 26.2% (FY 19 27.7%), while capital adequacy was 17.4% (vs 10% regulatory minimum).

Compared to Q4 19, net income was up 3%, largely due to higher operating expenses on account of the AMCON levy, which was not reflected in last quarter as it had been fully settled in the first half of the year.

Stanbic is one of our preferred Nigeria banks: Buy, TP NGN52

We reiterate Buy on Stanbic, which is one of our favoured Nigerian banks, with our unchanged NGN52.00 target price suggesting an ETR of 68%. Stanbic trades at 0.9x FY 19f P/B vs frontier banks at 0.8x, reflecting its: 1) highly profitable wealth segment; 2) robust capital adequacy ratio and NPL provisions coverage (22.3% and 98%, respectively, after fully adjusting for IFRS 9); and 3) superior and more diversified digital financial products versus most peers, leveraging the breadth of the group’s operations.

Key Positives

1. Non-interest income was up 21% yoy owing to a 47% increase in trading income, attributable to gains on the sale of some fixed income positions as yields continue to decline. Also, net fee and commission income rose 67%, driven by higher asset management fees (up 18% yoy) and financial advisory fees (up 41% yoy).
2. Operating expenses were down by 1% yoy as the bank recorded a NGN3.1bn reversal on provisions for legal costs, levies and fines, (which offset the 41% yoy increase in AMCON charges) as a result, the cost-to-income ratio improved by 5ppts yoy to 48%.
3. Gross loans and advances to customers increased by 15% qoq, most boosted by increased corporate working capital loans which were up 20%. However, as deposits were also up 13% qoq, the bank’s loan-to-funding ratio declined to 47% in Q1 20 (vs 67% in FY 19). Due to the present nature of the market and inherent uncertainty, the CBN is unlikely to impose any fines on the banks (at least for the short term) for failing to meet the prescribed LDR of 65% as at March 2020.

Key Negatives

1. Net interest income was down 8% yoy owing to lower yields on earning assets, which outweighed a reduction in funding costs as the bank increased its low-cost deposits, which accounted for 81% of total deposits in this quarter as compared to 71% as at FY 19.
2. The banks recorded slight asset quality deterioration as the NPL ratio also rose to 4.2% in Q1 20, from 3.9% in FY 19. Cost of risk rose to 1.2% (vs 0.9% in FY 19) owing to lower recoveries on loans and advances previously written off.