STANBIC's Price Rally Warrants a Downgrade to a HOLD


Tuesday, June 24, 2014 3:59 PM / Chapel Hill Denham Research

We downgrade our recommendation on
Stanbic IBTC Holdings Plc (Stanbic) to a HOLD from a BUY due to a strong rally in price. We however remain positive on the fundamentals of the business.

Downgrade to a HOLD on strong price rally

Valuation is rich but investment considerations remain unchanged. We downgrade our recommendation on Stanbic to a HOLD from a BUY as we believe the valuation of the stock is rich at this point, trading at FY-14E P/E of 10.0x, in line with our FY-14E P/E target of 10.1x. The stock has appreciated by 38.2% since 14 November 2013, when we upgraded our rating to a BUY from a HOLD. Furthermore, Stanbic has outperformed the NSE ASI by 29.3% over the same period, although its trailing P/E of 14.4x is still below the market trailing P/E of 20.32x. We believe the steadily improving cost to income ratio (CIR) seen in its Personal & Business Banking (PBB) and Wealth were the major catalysts of the uptick in the stock price. It is worth noting that our investment considerations on Stanbic are unchanged as we are of the opinion that the business remains fundamentally strong.  

Gaining traction on the improvements in high cost segment. The CIR of each of the three business divisions of the group has had a commendable quarterly trend between Q1-12 and Q1-14. The most noteworthy improvement is in the PBB division, where the CIR came below 100% in Q1-14 (at 97%), for the first time over the period, from an average of 118.8%. We believe the drive to improve efficiency in the PBB business will be sustained in the second half of 2014, with operating expenses inching up by 1.4% yoy in FY-14E. We believe staff and marketing costs will be contained. Furthermore, the Wealth division of the group posted steadily improving CIR over the period, from 47.7% in Q1-12 to 30.7% in Q1-14. The Pension Reform Bill 2013 seeks an upward review of the minimum pension contribution from the current 15% to 20% of employees’ monthly emolument. It also seeks a downward review in the minimum number of employees to 3 from 5 for organisations to be compelled to participate in the Contributory Pension Scheme. This is positive for the future growth in earnings for Stanbic IBTC Pensions, in our view.  

Positive run towards FY-14E results expected. We expect Stanbic to publish its H1-14E results in the next few weeks. We believe the results will be positive and exceed market expectations as indicated on Bloomberg. We expect an annualised EPS growth of 44.3% yoy vs. market expectation of 36.1% yoy. Stanbic’s EPS rose by 96.3% yoy in Q1-14, underpinned by a 420bps growth in loan to deposit ratio and a 240bps improvement in net interest margin. This resulted in a 42% yoy increase in net interest income. A 28.8% yoy growth in net fee and commission income and a 36.6% yoy reduction in impairment charges further supported the earnings growth. We expect gross loan growth of 15% yoy in FY-14E, up from the 8.5% yoy growth seen in FY-13.


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