Stanbic IBTC Holdings Plc posted an impressive H1 2020 result underpinned by double-digit growth in the bottom line. The group’s earnings grew by 8% YoY driven by 27% growth in non-interest revenue.
Operating profit rose by 7% YoY dragged by a significant YoY increase in credit impairment charges. However, the cost curtailment strategy by the group yielded result as profit before tax (PBT) advanced by 17% YoY.
Stanbic IBTC’s Profit after tax grew markedly by 25% informed by the lower effective tax due to change in tax basis for the banking subsidiary. Overall, EPS for the period stood at N3.96k from N3.42k in H1 2019.
Depressed assets yield weighs on net interest income
Stanbic IBTC’s interest income decreased by 9% YoY from N60.78bn to N55.13bn in H1 2020 due to the depressed assets yield despite the comparative growth in interest-earning assets in the period.
Essentially, interest on loans and advances to banks and investment income declined double-digit by 45% and 22%, respectively, despite the surge recorded in the asset base. We think that the steep declines were due to the collapsed asset yield informed by the sustained financial repression by the apex bank.
Elsewhere, interest expense declined YoY by 18% from N21.47bn in H1 2019 to N17.58bn in H1 2020 informed by deposit repricing and improved deposit mix by the group.
Specifically, the Stanbic IBTC’s CASA ratio improved by 930bps to 71% in H1 2020. Also, the group did not rollover expensive term deposits as shown by the steep decline in term deposits from N153.98bn in FY 2019 to N104.63bn in H1 2020.
As a result, the cost of funds moderated by 130bps to 2.8% in H1 2020. Notwithstanding the steep decline in interest expense, it was not enough to offset the impact in interest income as net interest income fell YoY by 4% from N39.31bn in H1 2019 to N37.55bn in H1 2020. Consequently, the net interest margin declined by 170bps to 3% in H1 2020.
Trading revenue bloats non-interest revenue
Non-interest revenue surged by 27% YoY driven primarily by the robust growth in trading income. Trading income advanced by 95% YoY from N17.60bn in H1 2020 to N34.26bn in H1 2020. The significant boost in trading income was primarily from fixed income as the group rode the yield curve. On the other hand, net fee and commission revenue and other income declined by 3% and 62%, respectively.
Elevated PAT on the back of cost optimisation and lower effective tax charge
Operating expenses declined by 3% YoY informed by the decrease in other operating expenses. While staff cost was flat, other operating expenses declined by 5% from N30.18bn in H1 2019 to N28.63bn in H1 2020 due to savings in premises and communication expenses during the period.
As a result, cost-to-income improved from 53% in H1 2019 to 45% in H1 2020.
Consequently, Stanbic IBTC’s PBT grew by 17% YoY from N44.65bn in H1 2019 to N52.41bn in H1 2020. Similarly, PAT advanced by 25% YoY from N36.25bn in H1 2019 to N45.20bn in H1 2020 on the strength of a lower effective tax charge.
We note the impressive growth in the group’s total asset by 61% from N1.88tn in FY 2019 to N3.02tn in H1 2020.
However, while Stanbic IBTC’s assets base grew significantly, core earnings during the period declined to save for the gains from trading income. While the decline in core earnings was not unexpected, given the COVID-19 disruptions amid challenging macroeconomic backdrop, we expect the group to leverage growth in its assets base to boost profits in the coming quarters.
However, regulatory headwinds remain a concern for us. We note that Stanbic IBTC has c.N851.09bn (c.28% of the group’s total assets) as balances with the CBN, which is not available for use and will continue to drag profitability. Also, the group’s effective CRR stood at 153% as of H1 2020.
Notwithstanding the regulatory headwinds, we expect the recent reduction in interest on savings accounts to boost net interest margin going forward. Overall, we have a revised EPS forecast of N7.33k for FY 2020 and a fair value estimate of N35.97k on the stock. At the current market price of N38.50k, the stock is trading at a forward PE of 5.3x (our justified PE 4.9x).
Thus, we recommend a HOLD.