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Stanbic IBTC - Wealth Business Continues To Unlock Valuation Upside

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Wednesday, June 14, 2017, 11:38 AM /CardinalStone Research

Following our meeting with the group CEO of Stanbic IBTC and an update to our growth assumptions of the Wealth Business, we raise our target price to N40.49 which presents a 37.3% upside from current price of N29.49.

Hence, we retain our BUY rating on Stanbic IBTC. Please find below our update on the HoldCo and key insights from our meeting with management.


Wealth Business Continues On a Strong Growth Path

The wealth division comprise of the asset management business (Stanbic IBTC Assset Management) and the pension fund business (Stanbic IBTC Pension Managers).


The AUM under the wealth business grew by 18.3% in FY’16 while the number of Retirement Savings accounts (RSA) in the pension business increased by 5.6% despite the rise in unemployment and the slowdown in economic growth.


The wealth business currently contributes 54.4% of the group’s fees and commission – this contribution has also been growing at a compound rate of 23.1% annually for the past 4 years.



Given the improved economic outlook and the current interest rate environment, we expect the AUM to maintain its strong growth trajectory of c.18% in 2017.

We also expect the growth in the number of RSAs to be better than last year and project a 7.5% growth as unemployment abates in light of the improved economic outlook.

For the non-pension AUM, management plans to lower the minimum subscription amount for its mutual funds to N5,000 from N50,000; this will further improve its penetration in the retail segment. 

It also intends to introduce a new fund which is Shariah compliant to cater for customers with socially responsible investment (SRI) concerns. 

Overall, management expects the strong growth in the non-pension assets (16% YoY in FY’16) to persist in 2017.

Personal and Business Banking (PBB) Expected To Break Even In 2018  

PBB cost of funds improved significantly in 2016
The Personal and business banking (PBB) arm crashed its funding cost by 100bps to 4.2% in 2016 as the retail bank aggressively increase the proportion of its current and savings account deposit (cheap deposit) at the expense of more expensive term deposit.  

Currently, it has one of the best funding cost among tier 2 banks. Also, Stanbic IBTC’s cost of funds is slightly better than the average for tier 1 banks. 

The significant decline in interest expense (as a result of lower funding cost) improved profitability in 2016 as the loss after tax from the PBB business improved to N1.6 billion in FY’16 from N8.6 billion in FY’15. 
 

 

 

 

Management to drive digital bank penetration to boost profitability Management will focus on ramping up revenue from its e-banking business and increase the adoption and penetration of its mobile banking application to boost revenue and improve bottom-line.  

Though income from e-banking grew by 30.6% in 2016, its contribution (8.9%) to total non-interest income remains very little when compared to other tier 2 banks average contribution of 24.0%.  

Hence, we believe there is room to further drive digital banking penetration and increase the contribution of e-banking income to earnings.  

Management also plans to drive customer acquisition and reduce dormancy rate by improving the efficiency of its front office and branch operations.  

In all, management believes that its strategy to ramp up e-banking revenue and increase customer acquisition will return the PBB business to profitability by 2018 financial year. 

Operating expenses may rise in the short term
Operating expenses in 2016 grew by 11.3% YoY, largely driven by the rise in employee cost (+21.5%) due to salary adjustments for inflation. In 2017, we see mild rise in OPEX largely due to the ongoing digital channels optimization and integration.  

Management however intends to halt branch expansion in the interim so as to curb rising OPEX while it intends to improve the efficiency of existing branches.  

 Overall, we expect operating expenses to rise by 7% and cost to income ratio for the group to consequently decline slightly to 53% in 2017 from 54.8% in FY’16.  

Asset quality: NPL ratio expected to decline to 5.0% in 2017
Non-performing loans (NPL) declined to N24.0 billion in FY’16 (6.4% of total loans) from N32.2 billion (8.5% of total loans), as the banking subsidiary took advantage of the one-off opportunity provided by the CBN to write off loans that have been provisioned for fully.  

Most of current NPLs are legacy exposures concentrated in the transportation & communication (26.3%), consumer credit (23.7%) and agriculture (15.4%) sectors.  

Management stated that it is currently carrying out house cleaning exercise and expects to further bring total NPL ratio down to 5.0% (c.N18.8 billion) by FY’17.  

Short term outlook
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 improvements in asset under management in the wealth business and the expected increase in fees and commission from the ongoing optimization of the PBB digital banking, we expect revenue from non-interest income to rise by 17.4% to N80.0 billion in FY’17.  

We project a growth of 7% in operating expenses premised on the impact of the cost 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. 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.  

Valuation

Following the release of the 2015 and 2016 financial performance, we have incorporated the impact of the significant growth in fees and commissions from a 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 37.3% upside from current price of N29.49. We place a BUY rating on STANBIC IBTC. 

FY’16 and Q1’17 Performance Review  

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.  

Impairment charges increased by 33% to N19.8 billion, driven by 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 iinflation.  

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.  

Risk asset growth was flat despite Naira devaluation
Despite the strong naira devaluation in 2016, net loans remained flat at N353 billion, which implies that management was extremely cautious and probably did not create new risk asset in 2016.  

Financial assets (including government securities) grew remarkably by 55% to N252.8 billion as the bank sought to take advantage of high fixed income yields.  

In order to significantly bring down its funding cost, the bank increased its Current and Savings deposit mix to 57% in 2016 from 44% in 2015, which brought down the ratio of expensive term deposits to 43% in 2016 from 56% in 2015.  

Total asset increased in 2016 by 12% to N1.05 trillion funded by the 14% growth in customer deposits.  


Nonperforming loans (NPLs) moderates in Q4’16
Contrary to industry trends in 2016, non-performing loans declined to N24.0 billion (6.4%) from N32.2 billion in 2015.  

This was as a result of the write off of loans that were fully provisioned by the end of the year. Non-performing loans in local currency accounts for 89% of total loans, while NPLs in foreign currency accounted for the balance of 11% of total NPLs.  

Transportation & communication, consumer credit and agriculture accounts are the three largest sectors contributing to NPLs, accounting for 26.3%, 23.7% and 15.4% of NPLs respectively. Coverage ratio excluding collaterals stands at 50% of impaired loans.
 

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