Please click the link “Stanbic IBTC Plc FY 2021 – Poor Earnings Performance Buoyed by Weak Earnings Quality” to access our earnings report Stanbic IBTC Plc.
Stanbic IBTC (‘the Group’) reported a relatively poor earnings performance in FY 2021, with gross earnings and profit after tax declining to their lowest levels since FY 2016 and FY 2017, respectively. Interest income declined by 12% YoY to N104.75bn, driven by the sustained low-yield environment. However, net interest income grew by 2% YoY to N29.38bn, on the back of deposits repricing despite liquidity pressures (CRR debits) and the Group’s CASA ratio decline to 76% (FY 2020: 88%).
Non-interest income declined steeply by 21% YoY to N101.04bn, largely resulting from a material decline in trading income in FY 2021. The management attributed the decline to low volatility and losses within its derivative transactions in FY 2021. The trading income decline was, however, partly offset by an 18% growth in fee and commission income. Major increases were recorded on fees line items including asset management fees (+16% YoY to N54.73bn) – riding on the back of a 10% YoY asset under management (AuM) growth, account transaction fees (+33% YoY to N5.09bn), and foreign currency service fees (+30% YoY to N7.03bn).
Nevertheless, operating income dipped by 9% YoY to N172.47bn. Whilst the Group kept its personnel expenses under control (flat at N42.04bn in FY 2021), other expenses increased by 24% YoY to N64.61bn, resulting from regulatory-driven expenses such as AMCON and NDIC. Therefore, cost-to-income ratio advanced to 62% in FY 2021 from 50% in FY 2020.
Profit before tax declined by 30% YoY to N66.00bn while profit after tax declined by 32% YoY. Despite the profit decline, the Group declared a N2.00 final dividend in addition to N1.00 interim dividend earlier declared during the financial year. This brings the total dividend for FY 2021 to N3.00 (FY 2020: N4.00).
The Group’s return on equity sank by 900 basis points to 15% in FY 2021, the least profitable year since FY 2015.
Major Developments during the Year
The Group recently announced of its intention to play in the fintech industry. On January 11, 2022, the Group notified the public that it had commenced the process of seeking regulatory approvals to establish a wholly owned Financial Technology subsidiary, to be known as Stanbic IBTC Financial Services Limited. According to the Group, the new subsidiary will primarily function as a Payment Solution Service Provider (PSSP).
During the Group’s analyst call, the management guided that the strategy was to leverage its existing brand and its partnerships to be stay competitive and deliver value to customers.
We note the significant loan book expansion by the Group, with a 47% YoY loan book growth in FY 2021 to N921.04bn. We attribute the significant loan growth to the Group’s strategy to use higher volumes to mitigate the impact of weak pricing on revenue, given the sustained low-yield environment. We expect loan book to grow further by 10% in FY 2022, with slightly improved pricing. As a result, we expect interest income to grow by 19% YoY, while we project net interest income growth at 12%.
On non-interest income growth, we expect to see a sustained growth momentum in fee and commission income. Also, we modelled higher trading income for the Group, albeit our projected figures remain below historical levels. In our view, we posit that the market environment that supported higher trading gains in the recent past years would not be present in the near term.
Overall, we expect to see bottomline recovery. Our earnings per share (EPS) forecast for FY 2022 is N5.65, representing a 35% YoY growth from N4.40 in FY 2020. Using a combination of absolute valuation methodology (Discounted Dividend Model) and relative valuation methodologies (Price-to-Earnings Multiple and Price-to-Book Multiple), we estimate a N31.48 fair value for the stock. Based on the -8% price differential and an estimated dividend yield, based on the current market price, the stock offers a 1% total return. Therefore, we recommend a HOLD.
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