H2: Stanbic IBTC Holdings’ Wealth Business Continues to Unlock Valuation Upside

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Strong net interest income growth supports bottom-line – Net interest income (NII) rose by 32% YoY to N57.9 billion in FY’16, the bank also sustained the trend in Q1’17 as NII rose by 79% YoY to N18.9 billion.

The marked growth in net interest income was due to the twin effect of the significant decline in cost of funds (interest expense declined by 24% in FY 2016) and current high yields on government securities.

However, impairment charges increased by 33% to N19.8 billion, driven by the accelerated provisioning on some delinquent assets as the bank took advantage of the one-off CBN forbearance to write-off fully provisioned asset.

Operating expenses also trended higher, rising by 11% YoY and 15.0% YoY to N69.0 billion in FY’16 and Q1’17 respectively and were driven by higher staff cost as the group adjusted its employee remuneration for inflation. In all, Stanbic recorded a strong growth of 51% YoY and 100.4% YoY in bottom-line to N25.8 billion and N16.1 billion in FY’16 and Q1’17 respectively.

Wealth business – major driver of valuation upside: We expect net interest income to rise by 26.3% to N73.1 billion, driven by our expectations that management will be able to sustain the low cost of risk at 4% as well as expectations that fixed income yields will remain high in the interim.

After adjusting for the expected rise in asset under management (AUM) in the wealth business and the expected increase in fees and commission from the ongoing optimization of the PBB digital banking, we envisage that non-interest income will rise by 17.4% to N80.0 billion in FY’17.

We project a 7% growth in operating expenses premised on the impact of the ongoing upgrade of the bank’s digital banking platform. On impairment charges, we expect a moderation of 24% to N15.1 billion in FY’17, given the aggressive clean up undertaken in Q4’16 and improved macro outlook.

On Etisalat loan, the bank exposure is just N7.3 billion and we don’t expect the impact on asset quality to be material if ongoing negotiations breakdown. Overall, we expect profit after tax to rise by 87.6% to N53.5billion with ROE and ROA improving to 33.9% and 4.8% respectively.

We maintain a BUY rating: Following the release of the 2015 and 2016 financial performance, we have incorporated the impact of the significant growth in fees and commissions from the wealth business (23.1% – 4 years CAGR), its increased contribution to fees and commission (54.4% of total fees and commission in 2016) as well as the impact of the expected increase in profitability of the PBB business.

Hence, we arrive at a new target price (TP) of N40.49 which implies a 28.5% upside from current price of N31.50. We place a BUY rating on STANBIC IBTC.

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