Stock Watch: Standard Chartered Bank (K) Limited

Standard Chartered Bank (K) Ltd (NSE: SCBK) announced its audited results for the period ended 31^st December 2014 on 26^th March 2015.

Recommendation: HOLD – Target Price – KES 350.53 (Upside – 2.5%)

7.4% Rise in Pre-Tax; 12.7% Growth in After-Tax Earnings to KES 10.44 Billion

SCBK announced 7.4% rise in pretax profits to KES 14.35 billion buoyed by 15.6% growth in non-funded income to KES 8.17 billion from KES 7.07 billion. Interest income spanned 2.0% to KES 22.12 billion despite loans & advances trimming by 5.3% to KES 122.75 billion owing to an improvement in NIMs by 30bps to 9.71%.

Management kept a lid on interest paid to depositors leading to a 14.3% drop in interest expenses to KES 4.22 billion as cost of funds retreated to 2.38% from 3.34% (FY13). Cost of customer deposits dipped by 10% to KES 3.03 billion disproportionate to total customer deposits down 0.4% to KES 154.07 billion.

As at 31^st December 2014, non-funded income contribution to total income grew to 31.3% Vs 29.7% attributable to 140.8% jump in other income to KES 2.28 billion.

Cost-to-Income Ratio Unchanged at 40.0%; Total DPS Up 17.2% to KES 17.00

Operating expenses spanned 12.0% to KES 11.73 billion as cost-to-income ratio deteriorated marginally by 2bps to 40.0% borne from 13.2% rise in employee costs to KES 5.78 billion. For the same period under review, loan loss provisions rose by 32.5% to KES 1.31 billion with non-performing loans up 179.4% to KES 10.75 billion stemming from a small number of account delinquencies triggered in the first-half of 2014. We maintain that this arose from the safety-conscious practice by management as opposed to general indication of overall risk of the entire loan portfolio.

The lender announced a final DPS of KES 12.50 to raise total DPS paid-out in 2014 to KES 17.00 from KES 14.50 (FY13). With a current dividend yield of 5.0% against the sector’s average of 3.0%, the counter is expected to experience accumulative activities in the run-up to its undisclosed book closure date.

Gross NPL Ratio Rises to 8.5%; 32.5% Expansion in Bad Debt Provisions

SCBK’s loan book contracted by 5.3% to KES 122.75 billion while customer deposits shaved off 0.4% to KES 154.07 billion to tapper the lender’s loan-to-deposit ratio to 79.7% down from 83.8% (FY13).

Gross NPL ratio jumped to 8.5% from 3.0% last year owing to a burgeoning 179.4% rise in non-performing loans to KES 10.75 billion.

Outlook: Optimum Buffers, 2.1% Gain YTD

SCBK remains optimally buffered against newly implemented capital regulation with core capital ratio and total capital ratios at 16.0% and 20.0% vis-à-vis CBK regulation of 10.5% and 14.5% respectively. Moreover with liquidity ratio at 46% compared to statutory requirement of 20%, the lender appears mobilised with cash to bolster its business momentum.

The share has reported a gain of 2.1% YTD (31/12/2014- Kes 335.0) and currently trades at P/E and P/B multiples of 10.30x and 2.60x in comparison to industry’s average of 10.83x and 2.46x- indicative of marginal headroom in returns.