Skye Bank - Capital raising concerns likely to remain a drag

Proshare

Thursday, November 20, 2014 4:43 PM / FBN Capital Research

 

More questions post-Mainstreet acquisition: In addition to capital raising (by mid-2015 reiterated), following the recent acquisition of rescued bank Mainstreet Bank by Skye Bank (final regulatory approvals still in the works), the market will have a lot to ponder in the coming year. Although management was guarded in what it disclosed on the transaction, we have assumed a N120bn price tag for Mainstreet as the newswires reported. Several other questions are still unanswered. The most significant relates to how this acquisition may lead to even more capital raising exercises, given that management’s capital adequacy ratio (CAR) forecast for end-2014 pre-acquisition is just 16% and the bank’s projected goodwill of N46bn post-acquisition is significant relative to the Q3 book value of N115bn.

 

We have increased our earnings forecasts by mid-teens going forward to reflect Mainstreet’s consolidation from Q4 2014 onwards. However, our unchanged price target of N3.1 assumes (a) a capital raising (tier 1) of N30-35bn to keep Skye’s CAR above the regulatory minimum of 15% in 2015E, leading to the ROAE remaining below 15% and (b) excludes 25% of the projected goodwill from the valuation. We think the uncertainty surrounding this capital raising will continue to weigh on the shares. As such, we retain our Underperform rating.

 

Q3 2014 results surprise positively: Skye Bank’s Q3 2014 PBT and PAT both grew by 26% y/y to N5.1bn and N4.1bn respectively. Profit before provisions grew by just 5% y/y yet combined with a 1.7% y/y reduction in opex to more than offset a 17.7% y/y increase in loan loss provisions; this drove the double-digit growth in PBT. Sequentially, PBT and PAT grew by about 33% q/q. driven by funding income which advanced by 30% q/q and offset a -7% q/q decline in non-interest income.

 

The strong q/q growth in funding income led to profit before provisions improving by 20% q/q to N23.6bn. Compared with our estimates, PBT and PAT both surprised positively, by around 17% because net interest income was 22% ahead of our N15.2bn forecast. The latter proved significant, overshadowing negative surprises on the non-interest income and provision lines.

 

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