Stanbic IBTC Pressure On Trading Income Amid Low Yield Environment Moderates Bottom-Line

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Amid a fragile domestic economy and prevailing negative real returns on investment, Stanbic IBTC Holdings Plc reported a 26% decline in gross earnings in its Q1 2021 result.

Interest and non-interest income declined year-on-year (YoY) by 23% and 29%, respectively. Operating profit decreased by 24%, while operating cost rose by 9% YoY.

As a result, profit before tax declined by 50%, while profit after tax decreased by 45% due to a lower effective tax rate. EPS for the group stood at N0.96k in Q1 2021 (Q1 2020: N1.91k).

Yield pressure on interest income continued to douse net-interest income Interest income declined YoY by 23% from N27.46bn in Q1 2020 to N21.01bn in Q1 2021 due to the continued pressure on the interest income lines.

Specifically, interest on loans and investment securities decreased YoY by 5% and 52%, respectively. The decline in interest on loans despite the year-to-date (YTD) comparative growth in loans and advances was due to the low-interest-rate environment.

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While yields have repriced upward since the beginning of the year, the pricing on the group’s loans and advances remained low in Q1 2021. On the other hand, while investment in financial investments declined by 4%, investment interest declined markedly by 52% due to the low yield environment in FY 2020.

Elsewhere, the group continued to consolidate on her cheap funding source, evidenced by the 50bps improvement in CASA ratio to 83% in Q1 2021. As a result, interest expenses declined 42% from N8.94bn in Q1 2020 to N5.15bn in Q1 2021.

Notwithstanding, net interest income nosedived by 14% from N18.52bn in Q1 2020 to N15.86bn in Q1 2021 due to the higher impact of the decline in interest income for the period. Non-interest income moderated due to pressure in trading income Non-interest revenue decreased by 29% YoY from N32.64bn in Q1 2020 to N23.08bn in Q1 2021, driven by a steep decline in trading income. Trading income declined by 78% from N14.42bn in Q1 2020 to N3.22bn in Q1 2021.

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However, a 23% growth in fee and commission income from N19.23bn in Q1 2020 to N22.44bn in Q1 2021 helped cushion the decline in non-interest revenue.

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We note the steep decline in the group’s profitability due to the sustained pressure on interest income and the significant decrease in trading income. We note that the group’s yield on risk asset remained low despite the repricing of income in the fixedincome market. We also note the steep decline in interest on investment and attributed it to the low-interest-rate environment in FY 2020.

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As the economy continues to recover, we expect repricing of risk asset to support interest income. Also, as the group continues to roll over investment assets at higher yields, we expect a recovery in interest on investment.

We also note the profound decrease in trading income and the significant increase in the group’s short position in government securities. While we cannot quantify the levels of gains that will crystallize upon unwinding of those positions, we believe that it may be material given the yield curve evolution since the year began. Overall, we maintain our one-year target price of N36.63k per share on the stock.

At the current market price of N50.00k, the share offers a total return of -20%. Thus, we recommend a SELL.

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