Earnings Report /
Kenya

Stanbic Holdings (Kenya): Disappointing FY 19 performance; downgrade to Hold

  • Operating costs tick up on early staff retirement in 2019 and one-off litigation costs

  • Asset quality continues to decline, outlook remains dim

  • Downgrade to Hold, TP unchanged at KES111.00

Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

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Tellimer Research
2 March 2020
Published byTellimer Research

We downgrade Stanbic Holdings to Hold from Buy (TP unchanged at KES111.00, ETR 7.5%). Stanbic released FY 19 results, with PBT coming in 16% below expectations. The performance would have been worse had it not been for the lower tax charge of 17%, after receiving some reprieve from the Kenya Revenue Authority (KRA) on recoveries made in 2019, which resulted in EPS inching up 2% yoy to KES16.14, in line with expectations. 

Weak balance sheet growth with a marginal improvement in net interest margin driven by the accumulation of higher retail loans. Management now targets a 60% local currency loan book contribution, up from the current 56% driven by the retail business. Asset quality continued to weaken on account of the bank’s corporate book. We do not see this as an isolated case as there has been a general weakening in the sector's corporate loans asset quality. Operating costs rose significantly after the voluntary early retirement programme carried out in 2019 and a one-off litigation-related payment. 

The shares are trading at a 2020f PB of 1.1x and PE of 6.5x. The bank recorded FY 19 ROE of 13.6%. Given the poor performance and the bank's low liquidity, we expect minimal investor interest in Stanbic Holdings. 

Outlook

  • Management is targeting higher loan growth in the SME, agriculture and retail segments in 2020. The major concern here is that these segments will continue to contribute to weak asset quality. 
  • Management plans to continue pushing its digitisation projects to retail consumers. Unlike local Tier 1 banks that have extensive retail reach (which result in higher non-interest revenue), management will need to keep relying on one-off corporate finance deals and trading income to grow its non-interest revenue. 
  • Management is intent on managing asset quality and noted expected distress in 2020 mainly from delayed government payments. Management also expects cost of risk in 2020 to settle between 1.4% and 1.7%. 

Key positives:

  • Net interest margin came in at 5.4%. Although a marginal improvement, Stanbic managed to book in more retail clients compared to its traditional foreign currency lending. 
  • The early retirement programme carried out for staff is likely to result in lower cost charges in 2020. 

Key negatives:

  • Weak balance sheet growth. Deposits grew 1% yoy and loans grew 4% yoy, which were 10% and 4% below forecast, respectively. We think continued weakness in asset quality will strain loan growth for the bank. Management noted that state-run agencies pulled out cKES5bn (3% of deposit book) from the bank in H2 19. Going forward, the bank expects raising deposit from the government to remain subdued.
  • NPL now at 12.9% compared to 10.6% in FY 18. At the same time, cost of risk jumped to 2.1% from 1.3% in FY 18. Coverage in the corporate business remains low at 30% compared to the personal banking business at 50%. 

Key risks

Management noted the coronavirus outbreak and strain in the real estate sector as key risks.