29% cut to our price target
We lower our recommendation on Stanbic IBTC (Stanbic) to Underperform from Outperform and cut our price target by 29% to NGN37.7 following a significantly weaker-than-expected Q1'21 set of results. Relative to our forecasts, the variance in earnings was due to negative surprises in funding and non-interest income as well as a negative result of-NGN6.3bn in other comprehensive income (OCI) vs our nil estimate. The negative surprise in funding income was underpinned by lower yields on earning assets, particularly from investment securities. Non-interest income declined by double-digits y/y due to a -78% y/y reduction in trading income from fixed income and currencies.
With respect to the operating segments, Wealth Management PBT grew 30% y/y. However, this performance was not enough to offset an -84% y/y decline in PBT by the corporate and investment banking business, and a pre-tax loss of -NGN1.8bn (vs. NGN880m Q1'20) by the Personal and Business Banking division. Consequently, we have cut our funding income and non-interest income forecast by -7% and -11% on average over the '21-22f forecast period. These cuts underpin the -20% average reduction to our '21-22f EPS forecasts.
However, our new price target of NGN37.7 is -29% lower because we have increased the risk-free rate driving our DDM valuation by 150bps to 12.5% to reflect the uptick in government bond yields. Following higher interest rate expectations, looking ahead (particularly in H2 '21), we expect funding income to start to benefit from loan repricing and higher asset yields. Our new forecasts imply a '21f ROAE of 18.5%, slightly lower than management's FY '21 guidance of 20-25%. Our new price target of NGN37.7 implies a potential downside of -25% from current levels.
Q1 '21 and Q4 '20 PAT (after OCI) down by -75% y/y and -34% y/y respectively
Q1 PBT and PAT (from continuing operations) fell -50% y/y and -45% y/y respectively. The main drivers were a -24% y/y reduction in pre-provision profits and a 9% rise in opex. While funding income declined -14% y/y, non-interest income fell by a wider margin of -29% y/y.
Following a negative result of -NGN6.3bn in other comprehensive income (OCI) (vs -NGN2.2bn Q1 '20), PAT (after OCI) fell by -75% y/y to NGN4.5bn. In Q4'20, Stanbic's PBT declined 18%, mostly because of a 71% y/y spike in loan loss provisions. PAT fell by a wider margin of -34% y/y because of a negative result of -NGN4.2bn in OCI (vs. -N119bn Q4 '19).