Earnings Report /
Kenya

Stanbic Holdings (Kenya): Poor earnings on lower margins and absence of one-off income

  • Stanbic Holdings has restructured 5-10% of its loan book so far

  • Net interest margin declined to 5.3% from 6.2% in Q1 19 because of the 200bps reduction in the policy rate

  • Management expects higher provisioning on weaker collateral value and weakening economic environment

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

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Tellimer Research
18 May 2020
Published byTellimer Research

We retain Stanbic Holdings as a HOLD (TP unchanged at KES111.00). Stanbic Bank, the key subsidiary of the listed entity Stanbic Holdings, released poor Q1 20 results with its EPS declining 33%yoy. Results were poor mainly on the back of reduced net interest margin following cuts in the central bank rate. We expect margins to continue lowering following recent further cuts in the central bank rate. In the absence of one-off incomes made from 2 deals in Q1 19, the bank’s non-interest revenue declined 29%yoy. We expect no-interest revenue to remain muted as deals within the corporate space are likely to be hard to come by during this pandemic period. Management expects the economy to recover after a minimum of about 18 months. Balance sheet growth was positive with loans and deposits growing 12%yoy and 6%yoy respectively. This growth is however expected to be muted over coming quarters on account of Covid-19 impact.

Stanbic Holdings shares are trading at a current PB of 0.9x and PE of 5.5x. The bank entity recorded a Q1 20 ROE of 13.7%.  

Outlook

  1. Management is concerned about three risks; locusts (though not yet in food basket areas, the new swarms are a potential risk to food security), floods following recent heavy rains and Covid-19 impact. 
  2. High risk sectors according to management include; tourism, diaspora remittances, real estate (now includes rent collection as well), oil and Gas, informal sector and SME. The bank does not intend to be very active in these sectors going forward. 
  3. Net interest margin likely to weaken further on account of old loans still linked to the Central Bank Rate.
  4. Management expects Covid-19 to move from a pandemic to endemic and the country will need to consider it a new normal.  Management estimates economic recovery time to be a minimum of 18 months, before then there would need to be some stimulus from Government. 
  5. About 13 Corporate loans have been restructured but management is confident the institutions will ride out a period of 3-6 months without further restructures. In personal and business banking, salary cuts have been the key pain point and restructures have mainly been on payments. Most SMEs have been given 3-month payment holiday by the bank. Overall, there is general expected asset quality weakness going forward.  
  6. Points of opportunity for the bank include the medical field, e-commerce service providers and technology firms. Management is looking out on how to lend to these segments going forward.

Key positives:

  1. Positive balance sheet growth with loans up 12%yoy and deposits up 6%yoy. 52% of loans are now in local currency which we see as positive as it improves the ability of the bank to reprice loans. However, we expect balance sheet growth to be anaemic for the bank due to Covid-19.
  2. Lower staff count, after the bank carried out a voluntary retirement programme last year, saw staff costs reduce by 14%yoy. The bank still expects to maintain low costs while leveraging on technology. 

Key negatives:

  1. Net interest margin reduced to 5.3% from 6.2% in Q1 19 on account of 200bps reduction in Central Bank Rate in 2019. Old loans are still priced against the Central Bank Rate and hence the recent cuts are expected to lower net interest margin further. 
  2. Gross NPLs increased 3%yoy. The trade segment was already impacted negatively by Covid-19. 5-10% of loans have been restructured so far. The bank is more worried about the personal and business banking segment compared to corporate owing to increased salary cuts and job losses. Management noted collateral values will be impacted negatively and hence the bank will likely require higher provision especially as real estate prices weaken. Additionally, the level of provisioning is set to increase as clients move from stage 1 to stage 2 in the expected credit loss stages.
  3. Non-interest revenue declined 29%yoy. The bank had some 2 significant deals closed within Q1 19 in private and public sector which did not recur in Q1 20. We believe the bank is unlikely to land lucrative deals in 2020 with the economy having slowed down.

 

Key-risks

Locusts invasion, Covid-19 impact and recent floods.