Equity Analysis /

Stanchart Ghana: Q1 19: Core earnings weaker than expected, Sell

    Ayodeji Dawodu
    Ayodeji Dawodu

    Equity Research Analyst, Industrials

    Rahul Shah
    Rohit Kumar
    Tellimer Research
    7 May 2019
    Published by

    SCB reported an 8% yoy increase in PAT in Q1 19, driven predominately by a loan impairment writeback of GHS3mn against an impairment charge of GHS13mn in Q1 18. However, core earnings were flat yoy (11% lower than expected) on weaker net fee income. As a result, the bank’s PAT came in 5% lower than our forecast. Furthermore, SCB’s total operating income was up just 2% yoy against the peer average increase of 28%.

    We maintain our Sell recommendation on SCB with an unchanged TP of GHS10.70 and ETR of -42%. Our view is backed by: 1) the recent net interest margin compression; 2) an increase in the cost to income ratio and 3) the high NPL ratio (23.7%) relative to peers (10.6%). However, ongoing improvements in asset quality could present an upside risk to our valuation. The bank’s stock currently trades at 3.2x PB, against a 5-year historical average of 4.2x.

    Pre-provision profit was down 5% yoy. Unlike peers, SCB reported weak total operating income performance due to the decline in non-interest income. While there was an improvement in the bank’s trading income (like peers), the decline in net fee income (down 24% yoy) weighed on non-interest income. Furthermore, net interest margin moderated, on the back of higher cost of funds (up 40bps yoy to 2.8%) hindering the bank’s net interest income growth. 

    Operating efficiency declined on higher operating expense. SCB’s cost-to-income ratio increased to 37%, from 32% in Q1 18, on the back of the increase in operating expense. We could see the bank’s cost-to-income ratio rise to 46% at the end of 2019f due to further deterioration in net interest margin and higher operating expense.

    NPL ratio is still relatively high compared to peers, but moderating. The bank’s NPL ratio fell to 23.7%, from 46.3% in Q1 18, but remains the highest amongst our Ghana banks coverage. Nonetheless, the slide in the NPL ratio most likely contributed to the net impairment writeback in Q1 19, leading to the growth in PAT. As the bank continues to focus on asset quality, we expect the growth in investment securities (up 11% yoy) to continue to outpace the growth in loan book (up 9% yoy).

    Deposit growth was largely in line with expectations and ahead of peer the average (13%). Due to the increase in deposits, which was ahead of the growth in loan book, the bank’s net loan to deposit ratio fell to 20% at the end of Q1 19, the lowest amongst our Ghana banks coverage.