Tuesday, April 28,
2020 / 2:56 PM / by FBNQuest Research
9% cut to our price target due to a 100bp increase in ERP
Stanbic IBTC's (Stanbic) Q1 2020 PBT was in line with our forecast. As such, we have made limited revisions to our 2020E earnings forecast. Regardless of the limited variance in earnings relative to ours, both revenue lines diverged markedly from our forecasts. Although the bank's loan book expanded by 15% q/q, funding income surprised negatively because of a 90bp q/q reduction in net interest margin (NIM) due to the subdued interest rate environment.
Consequently, we have cut our 2020E NIM forecast by 20bps and our funding income forecast by c.3% to reflect the downward pressure on NIMs. In contrast to the weakness in funding income, non-interest income surprised positively on the back of stellar growth in fx trading revenue. An increase in net fee and commission income, particularly from the wealth management business also helped. Going forward, we believe that the uncertain macroeconomic conditions and volatility in the fx environment bode well for trading income.
As such, we have upgraded our non-interest income forecast for 2020E by c.4%. Despite the limited revisions to our 2020E EPS forecast, our new price target of N46.4 is c.9% lower because we have increased our equity risk premium assumption by 100bps to 7.5%. On a relative basis, the shares are trading on a 2020E P/B multiple of 0.9x or a premium of a 102% over the sector's average multiple of 0.4x.
We believe that this premium is justified by the bank's stronger returns profile relative to the sector - 2021E ROAE of 22.3% vs. the sector's 16.4%. Having shed -30.5% ytd (vs. -15.7% ASI), Stanbic's shares imply a potential upside of 63% from current levels. As such, we retain our Outperform rating on the shares.
PBT up 4% y/y driven by double-digit growth in non-interest income
Stanbic's Q1 PBT grew by 4% y/y to N24.4bn on the back of pre-provision profit growth of 8% y/y. The y/y improvement in pre-provision profit was driven by a 21% y/y increase in non-interest income which completely offset an -8% y/y decline in funding income.
The y/y expansion in non-interest income was underscored by solid growth of 47% y/y in fx trading income and a 7% y/y increase in income from net fees.
Although impairment for credit losses increased to -N2.0bn compared with net recoveries of N1.4bn in Q1 2019, the growth in pre-provision profit proved significant, and completely offset the negative from this line. Below the tax line, PAT declined by -20% y/y to N18.1bn because of a negative result of -N2.0bn in other comprehensive income.
Sequentially, PBT advanced by 12% q/q thanks again to the double-digit (+22% q/q) growth in non-interest income. Compared with our forecasts, both PBT and PAT were in line.
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