Q1 19 net income fell 17% yoy to NGN18.5bn, only slightly lower than our NGN19.1bn forecast. The earnings decline was due to a drop in net impairments write-back (down 73% yoy), as expected. Pre-provision profits were up by 3% yoy as net interest income rose by 7% yoy while total operating expense was flat yoy. These offset weaker net fee and commission revenues (down 6% yoy), which stemmed from weaker fee margin for the pensions business and a decline in other commissions.
Reiterate Buy with an unchanged TP of NGN56.00. Stanbic, along with Zenith and GTB, is one of our top picks among Nigerian banks. We remain attracted to: 1) the highly profitable wealth segment (FY 18 ROE of 49.8%); 2) its robust capital adequacy ratio and NPLs provisions coverage (25.3% and 150%, respectively after fully adjusting for IFRS 9), and; 3) its potential to offer more diversified digital financial products than most peers, leveraging the breadth of the group’s operations. Stanbic trades at 1.7x FY 19f PB versus frontier banks at 1.5x.
Fee income declined due to pension regulations and weaker market activity. Fee margins declined by c0.3ppts yoy for the pensions business led by regulatory changes to the industry fee structure, as well as reductions in fees on brokerage, custody, financial advisory and FX services, reflecting subdued capital market activity in Q1. Pension fee margins are likely to remain under pressure, however, AUM growth should offset some of this, building on the 6% qoq growth recorded in Q1. On the upside, there were increases in e-banking and card-based fees.
Total operating expense was flat despite a marked increase in regulatory costs. AMCON charges surged by 56% yoy to account for 33% of total opex (from 23% in Q1 18), in a similar trend to peers. This was, however, offset by an 11% yoy decline in personnel costs (likely on account of the 2% reduction in headcount in FY 18), as well as an 81% drop in impairments on financial assets under opex. The cost/income ratio was flat at c53%.
Drop in term deposits could drive cost of funds reduction. Term deposits fell by 27% relative to end-FY 18 and drove an 8% qoq decline in total deposits, despite a pick-up in current and savings account (CASA) deposits. The CASA ratio improved to 65% from 57% at end-FY 18. Based on our estimates, cost of deposits fell by c0.3ppts qoq, a trend that could continue if the deposit mix improves further. Gross loans were down 4% qoq, pulling back on the 14% yoy growth in FY 18. The NPL ratio was relatively flat qoq at c4.0%.