Stanbic IBTC Holdings Plc, in its Q1 2020 result reported a 5% growth in gross earnings driven by a substantial increase in non-interest income. Interest income declined YoY by 12% while non-interest revenue thrived by 21%. Profit before tax (PBT) advanced by 4% while profit after tax grew by 8% on the back of a lower effective tax rate. EPS for the period stood at N1.91k (Q1 2019: N1.81k).
Low yield environment weighs on net interest income
Interest income decreased YoY from N31.14bn to N27.46bn in Q1 2020 driven by lower revenue from investments and loans and advances to banks. While interest on loans and advances to customers increased YoY by 8% to N16.86bn (Q1 2019: N15.63bn), revenue from banks nosedived 42% to N617mn from N1.07bn in Q1 2019. Though the group’s gross loans and advances grew double-digit YoY by 15% to N640.40bn from N556.40bn in FY 2019, the slower growth in revenue was due to the loan-to-deposit ratio (LDR) policy of the CBN. The LDR policy which came in force in September 2019, has continued to pressure risk asset pricing in the industry due to heightened competition amid the pressure among players to beat the regulatory threshold of 65%. Similarly, interest on investments declined markedly by 31% to N9.98bn from N14.45bn in Q1 2019 due to the low yield environment. The yield on risk-free securities has remained depressed at single-digit following the Central Bank’s ban on local investors from accessing the OMO Window.
Elsewhere, interest expense declined profoundly YoY by 18% to N8.94bn in Q1 2020 (Q1 2019: N10.96bn) despite the year-to-date growth in customers deposits by 13% from N637.80bn to 722.30bn in Q1 2020. The decline in interest expense was driven primarily by a steep decrease in interest on term deposits by 48%. Interest on term deposits declined from N4.41bn in Q1 2019 to N2.27bn in Q1 2020 as the group continue to replace expensive deposits with a cheap source of funding. As a result, the deposit mix (current-and-savings-accounts deposits to total deposits) improved to 81% in Q1 2019 from 71% in December 2019. Nonetheless, the decline in interest expense was not enough to compensate for the fall in interest revenue. Thus, net interest income declined YoY by 8% from N20.19bn to N18.52bn in Q1 2020.
Trading revenue bloats non-interest revenue
Non-interest revenue grew markedly by 21% from N27.00bn to N32.64bn in Q1 2019 informed by substantial growth in trading income. Trading income increased by 47% to N14.42bn, driven by robust growth in revenue from fixed income, which grew YoY by 47% to N14.52bn in Q1 2020 (Q1 2019: N9.86bn). Also, a 7% increase in net fee and commission revenue to N17.91bn (Q1 2019: N16.79bn) driven by asset management fees also supported accretion to non-interest revenue.
PBT elevated on the back of cost optimisation
The group’s operating expenses declined mildly by 1% from N25.07bn to N24.78bn in Q1 2020. Though staff costs increased YoY by 8%, the 7% decline in other operating expenses was more than enough to offset the rise in staff expenses. As a result, the group’s cost to income ratio improved to 48% from 53% in Q1 2019. On the back of robust growth in non-interest revenue and cost optimisation strategy of the group, PBT grew YoY by 4% from N23.51bn to N24.41bn in Q1 2020. PAT settled at N20.60bn, an 8% growth from N19.15bn in Q1 2019. The group’s return on average equity annualised stood at 26% in Q1 2020.
Recommendation
We applaud the group’s resilience in growing top- and bottom-line despite the challenging market conditions. The declining yields on loans and investments have continued to pressure net interest margin. Also, the regulatory induced reduction in revenue from transactional fees and asset management had subtracted from noninterest income. Nonetheless, the group was able to offset these pressures with growth in transactional fees and assets under management, which drove the growth in non-interest revenue. That said, we note the deterioration in the group’s asset quality given the steep increase in credit impairment charges. We observed that the group’s exposure to the oil and gas sector grew substantially by 132% from N70.78bn to N164.40bn in FY 2019. Given the dual impact of the coronavirus pandemic and downturn in oil prices, this raises significant concern for us. While we believe that earnings may come under pressure going forward, we think that gains from cost optimization as well as lower funding cost may provide respite for the group.
Valuation
Our dividend discount model (DDM) for the stock is N32.39k, which represents a 14% discount to the market, and a dividend yield of 9%. While the DDM is our preferred model, residual income approach estimates a 16% premium to the market, fairly valued at N23.90k. We deployed a blend of the two models. We have a forward EPS of N6.91k with a reasonable estimate of N28.15k on the stock. At the current market price of N28.50k, the stock trades at 1% premium to our fair value estimate with justified PE of 4x. Thus, we recommend a HOLD.
