Stanbic Bank, the key subsidiary of Stanbic Holdings, recorded a 19% yoy rise in Q1 19 EPS. This was 26% above our expectations and the best performance among Kenyan banks. Key (positive) highlights include; 1) higher net interest margin from higher loan yields and lower cost of funds, 2) 18% yoy growth in non-interest revenue driven by fee and commission income from client transactions, and strong FX income from trade finance, 3) low growth in operating expenses (+5% yoy). Earnings were dampened slightly by an almost ten-fold rise in loan loss provisions charge after gross NPLs/net loans ratio rose to 11.6% from 8.1%. The ROE was 22.6%, higher than our 18.0% forecast.
Reiterate Buy on Stanbic Holdings with an unchanged target price of KES111.00 (ETR 22%). Stanbic Holdings trades at a 2019f PB of 1.0x and a 2019f PE of 6.0x. Our recommendation is based on: 1) higher than local peers’ non-interest revenue income, driven by a large trading securities book and a strong investment bank franchise, 2) high dividend payout ratio driven by completed investments in its retail banking arm and a strong capital base, and 3) large foreign currency book driving FX income, but reducing net interest margins. However, KCB is our top pick among Kenyan banks.
Non-interest revenue income continues to support earnings. Fees and commission income grew by 61% yoy on increased customer transactions. Exchange income grew by 85% yoy. Notably, the bank increased its activity on trade finance in Q1. Other income decreased by 87% yoy, with most of it related to trading income. The bank still has one of the highest allocations for trading securities, at 14% of total assets and we believe there is room for additional income as rates continue to fall.
Cost growth remains low at 5% yoy. The cost/income ratio fell to 43.6% in Q1 19 from 49.4% in Q1 18. With the bank completing the investment phase of its retail arm, we believe the only significant cost would be upgrading its technology. Going forward, we expect cost growth to be in line with inflation and maintain a lower-than-local-peers cost/income ratio.