Stanbic Holdings (Kenya) released H1 20 results with EPS declining by 37% yoy to KES6.46. The weak performance was driven by: higher loan loss charge (+61% yoy), which was expected on the back of a weaker economic environment; a decline in net interest margin following cuts in the central bank rate on which some loans are attached; a 19% yoy fall in non-interest income as some key one-off incomes from deals made in H1 19 were absent and a higher tax charge of 38% (up from 27% in H1 19).
We have a Hold recommendation on Stanbic Holdings (Kenya), which is trading at a current PB of 0.8x. This is against H1 20 ROE of 11.6%. In our coverage universe, Stanbic is one of our least preferred picks due to lower-than-industry net interest margin from its large foreign currency loan book, low retail penetration that hampers income from alternative channels and high non-performing loans. The bank, however, continues to deliver above-industry non-interest revenue contribution from its strong investment banking arm and trading income. The bank also runs a lean operation model, with its cost/income ratio falling below industry average.
Cost/income declined to 46.5% in H1 20 from 48.0% in H1 19. This was due to a 15% yoy fall in operating expenses. In 2019, the bank had a voluntary staff retirement programme, which resulted in staff costs declining by 4% yoy.
Deposit growth was strong at 23% yoy. Notably, there was a 20bps decline in cost of funds evidencing that these were mainly retail deposits. The bank has been working to increase its share in the retail business, which accounted for 52% of deposits in 2019 up from 47% in 2018.
Net interest margin declined to 4.8% in H1 20 from 5.7% in H1 19. This rate is lower than the industry average as the bank’s loan book is heavily corporate (about 46% of loan book) and the bank has higher-than-industry exposure to foreign currency loans. For the local currency loans, facilities that were issued prior to November 2019 are still tied to the central bank rate, which has so far been cut in 2020 leading to declining loan yields.
Non-interest revenue declined by 19% yoy. Fees and commission income fell by 33% yoy with loan fees declining after loan book growth was down by 1% yoy and other fees income impacted by the waiver on mobile banking charges.
Loan loss provisions increased by 61% yoy as gross NPLs increased by 18% yoy. The provisions increase was expected on account of the weakening economic environment. Management was also looking to ramp up provisions in light of the declining value of assets, which has impacted the value of collateral held.