Stanbic Uganda released FY 20 results with EPS declining by 7% yoy to UGX4.72 and beating our expectations by 34%. The key point of variance was on non-interest income where the bank beat our estimates by 26% after a lower-than-expected decline of 2% yoy in fees and commission income. The bank unexpectedly issued a dividend of UGX1.95 per share, which is subject to approval by the regulator.
Net interest margin declined by 9.9% in FY 20 (from 11.0% in FY 19) after the bank reduced loan yields by 200bps
The net interest margin was in line with our estimates. We expect a further dip to 9.4% as we expect lending rates to remain subdued with the Covid-19 pandemic continuing to negatively impact the credit environment. Loans and deposits increased by 27% yoy and 16% yoy, respectively.
The bank restructured 22% of its loan book in FY 20
This was an increase from the 14% recorded in H1 20. Management had noted that the restructuring requests declined in H2 20, hence the lower restructuring rates compared to Kenya’s restructuring rate of 57%. The Bank of Uganda extended the allowance for restructuring loans by 6 months. In our view, while this is positive for the banking sector, it creates less visibility for asset quality. For Stanbic Uganda, we do not expect a significant uptick in restructured loans in 2021. Overall, NPLs increased by 19% yoy despite accelerated write-offs in 2020.
Non-interest revenue declined by 5% yoy, 26% above our estimates
Fees and commission income was a key surprise as it decreased by only 2% yoy. Management had anticipated an uptick in digital transactions, which has paid off. We noted previously that digital transaction values jumped by 39% yoy in Q3 20, which is positive for Stanbic Uganda – the bank has more than 85% of its transactions taking place on digital platforms. Additionally, the bank is particularly keen on investing in digital lending and agency banking, which continue to show strong growth. Going forward, we expect fee and commission income to record strong growth.
Cost/income ratio decreased to 50.6% in FY 20 from 51.3% in FY 19
This was much better than the 57% we had anticipated. The ratio was lower than our estimate on higher revenues and lower-than-expected operating cost.
We retain our Buy recommendation with a target price of UGX36.00
Our Buy recommendation is based on: 1) expected improvement in cost efficiency from technology adaptation; 2) better-than-industry asset quality with low exposure to high-risk market segments and higher-than-peers NPL coverage level at about 90%; 3) expected increase in fee and commission income from volume growth in digital channel transaction; and 4) its market-leading position in assets, deposits and profitability, which is largely unchallenged as industry players remain plagued by low asset quality, smaller balance sheet size, lower capital, and continue to fall behind in digital channel investment.