Earnings Report /

Stanbic IBTC: Q3 21 profit drop in line with expectation; trading revenue remains the trigger

  • The group's profits for the quarter fell 18% yoy, due to a mixture of lower trading income and higher operating costs

  • Interestingly, net interest income was better than expected, as the group's aggressive loan growth drive yielded benefit

  • We retain our Buy rating; diversified revenue streams and strong capital ratios remain positive factors

Tellimer Research
25 October 2021
Published byTellimer Research

Q3 21 earnings season for Nigeria Banks has kicked off, with Stanbic IBTC being the first in our coverage to report its results. The diversified holding company's Q3 21 profits were in line with our expectation, as net attributable profit fell 18% yoy to NGN16.7bn, close to our estimate of NGN16.5bn.

The major driver of the earnings drop remained the same as the previous two quarters, as Stanbic IBTC’s trading revenue fell 65% yoy, which management attributed to lower fixed income and FX market activities this year, as well as its smaller derivatives book with the CBN. We previously highlighted that trading revenue is a key source of revenue for Stanbic IBTC, compared with peers. Nevertheless there was a 58% improvement qoq, as Q3 saw an increased volume of trading activities compared to Q2.

Contrary to our expectation for a 25% decline, the group's net interest income improved 13% yoy. Clearly, the recent aggressive lending efforts (gross loans up 30% ytd) benefitted margins, and outweighed the drag from the low yields on investments securities (which Stanbic has a large proportion sitting in low-yielding CBN special bills). However, funding pressures remained, as interest costs from customer deposits increased 34% yoy, in line with the large increase in tenored deposits during the quarter (up 86%). The group has continued to bear the brunt of the unfavourable CBN CRR debit dynamics, raising relatively expensive funding to support liquidity and asset growth. Overall, the group's Q3 ROE and ROA dropped to 19.4% and 2.6% respectively, compared to 23.7% and 2.9% in Q3 20.

We retain our Buy recommendation with 12M TP of NGN47

Following Stanbic IBTC’s results, we maintain our recently downward revised 12M target price of NGN47, which translates to an expected total return of 24% at its current share price and a Buy recommendation. The group's diversified lines of business, exposure to non-commercial banking businesses and substantial access to cross-selling opportunities remain valuable. Moreover, the group remains well capitalised, with CAR at 21.7%, which is supporting loan growth. Asset quality metrics remain healthy, with NPL and coverage ratios at 3.4% and 113%, and the group having the lowest proportion of restructured loans in our coverage. Stanbic IBTC is currently trading at 9.4x FY 21f PE and 1.20x tangible PB, a premium to the average 4.4x FY 21f PE and 0.58x tangible PB for our Nigeria banks coverage.

Key positives

  1. Net interest income rose 13% yoy (24% qoq), as a result of higher income from loans and advances. The group's lower reliance on interbank funding also improved its margins.  

  2. Given the improved macroeconomic prospects compared to 2020, the group recorded a net loan impairment reversal of NGN511mn, compared to a charge of NGN641mn in Q3 20.

  3. The group's NPL and coverage ratios remain healthy at 3.4% vs the 5% prudential guideline, and 113% above the adequate threshold of 100%. Proportion of stage 2 loans also dropped from 3% to 1% qoq.

Key negatives

  1. The group's non-interest income fell 19% yoy, on the back of lower trading revenue (down 65% yoy). Although fee income grew 10% yoy, mainly from asset management and account transaction fees,

  2. Coupled with lower revenues, operating efficiency declined as expenses were up 8% yoy on higher IT expenses and deposit insurance premiums. As a result, the group's cost/income ratio was 54%, compared to 47.1% in Q3 20. Although it improved qoq given the absence of AMCON levies in Q3 21.

  3. The group's cash reserves with the central bank increased 39% qoq, as the regulator continued its aggressive CRR debits. As at H1, Stanbic IBTC had the highest effective CRR in our coverage at 56.4%.

  4. The proportion of current and savings deposits (CASA) dropped to 69%, from 81% in Q2 21. During the quarter, term deposits grew by a whopping 86%, while current and savings deposits dropped 3%.

  5. The group's capital adequacy dropped 1.5ppts to 21.2%, but remains well above regulatory minimum. 

Stanbic IBTC's Q3 21 results summary