Earnings Report /

Stanchart Ghana: Q2 19 – Asset quality issues weigh on PAT; reiterate Sell

    Nkemdilim Nwadialor
    Nkemdilim Nwadialor

    Equity Research Analyst, Financials

    Ayodeji Dawodu
    Olabisi Ayodeji
    Tellimer Research
    6 August 2019
    Published byTellimer Research

    SCB reported a 21% drop in PAT in Q2, largely due to a sharp rise in net impairment charge (up 4x yoy), even as pre-provision profit rose 39% yoy. Net interest income rose 30% yoy and non-interest income rose 35% yoy, while the cost/income ratio fell 4ppts to 36%. The net interest margin trend was mixed; net interest income/assets was flat yoy at 9.0%, but up 120bps qoq due to improved asset yields (up 140bps qoq).

    Reiterate Sell with an unchanged TP of GHS10.70 and ETR of -37%. Our view is based on the bank’s weak asset quality position, as its NPL ratio remain elevated at 22.4% in Q2 19, compared with the peer average of 9.9%. SCB is trading at 2.0x 2019f PB versus Ghana peers at 1.5x.

    Strong revenue generation drives operating performance. Total operating income rose 35% yoy from increases across major revenue lines, which led to a 130bps decline in the cost/income ratio to 36%. Operating expense rose 19% yoy, largely on account of a sharp rise in depreciation expense (up 4.5x yoy) that could reflect the adoption of IFRS 16. SCB has the lowest cost/income ratio among our Ghana banks coverage, supported by its stronger digital and electronic banking infrastructure.

    NPL ratio was down 1.3ppts qoq to 22.4%, but was still much higher than the peer average. Management has not disclosed the coverage ratio for the period, which was 42% at end-FY 18, but reported CAR of 27.1% (versus the 13% threshold). Net loans were up by 2% qoq and investment securities rose 7% qoq, while deposits fell 2% qoq.