Stanchart Ghana: Q1 20 – Strong top line growth as funding cost moderates

SCB reported Q1 19 PAT of GHS109mn (up 25% yoy) supported by a 25% uptick in net interest revenue, 84% increase in fee income and improved impairment write backs. Net interest margin was also up by 0.3ppts owing to lower funding costs. Compared with Q4 19, PAT was up 35% while NIM contracted by 5ppts.

We reiterate our Hold recommendation on SCB with a TP of GHS15.7 (-12% ETR). Our recommendation is on account of: 1) its relatively high valuation relative to peers, with FY 20f P/B of 2.2x, implying a 173% premium, and 2) weaker asset quality, as its NPL ratio at 21.4% is the highest within our Ghana banking universe.

Key positives

1. Net interest income is up 27% yoy as the bank's continued emphasis on its retail business resulted in a 5ppts decrease in funding cost. The bank's fee income was also up 83% yoy driven by the increased use of e-banking and other digital channels.
2. Cost/income ratio came in at 36% (vs 37% in Q1 19) despite a 22% increase in operating expenses from higher personnel and IFRS 16 lease expenses. Recall that SCB has the lowest cost/income ratio within our Ghana banks coverage.
3. Strong balance sheet growth over the quarter with loans up 7% and deposits up 12%, as the bank continued to drive its retail franchise. SCB’s strong capital ratios with CAR at 28.8% (vs 25.2% in Q1 19) should continue to support asset growth over the medium term.

Key negatives

1. Asset quality deteriorated with NPL rising by 4.2ppts to 21.4% in Q1 20 – this ends a six-quarter streak of continued NPL ratio improvements (from 34.8% in Q3 18 to 17.2% in Q4 19).