CFC Stanbic Bank Releases Full Year Results for 2015

CFC Stanbic Holdings Limited (NSE: CFC), released their FY15 results for the period ended 31st December 2015, with the following highlights:

PBT Repressed by 4.4% and PAT down 13.7% to KES 4.90 billion

CFC Stanbic Holdings announced a 14% decline in after-tax profits to KES 4.90 billion buoyed by a 9.1% dip in non-interest revenue to KES 7.64 billion from KES 8.41 billion in FY14.

Net interest income increased by 9.9% to KES 9.30 billion on the back of a 19% growth in its loan book. Overall, NIMs tightened to 5.4% (FY15) from 5.6% (FY14) as interest rate spreads came under pressure.

As at 31st December 2015, non-funded income contribution to total income declined to 45.1% attributable to the South Sudan Pound devaluation, as a result of exchange rate reforms in the country. This resulted in approximately KES 1 billion revaluation loss in foreign currency translation.

Cost-to-Income Ratio Enhanced to 51.2% from 60.9% previously

Operating expenses rose by a slight 2.5% to KES 8.68 billion driven by the bank’s efficient utilization of the value chain and the alternative delivery channels. Effiencies were also drawn from upgrade of the core banking system.

CFC Bank is predominantly a corporate focused bank, thus its expansion drive is slower compared to other banks. Only two branches are slated for opening in 2016; Two Rivers and Garden City branch. We however don’t anticipate a huge rise in operating expenses.

Book Quality Deteriorates to 2.9%

The bank’s book quality worsened from 2.2% in FY14 to 2.9% in FY15, largely attributable to the high volatility of interest rates experienced in 3Q15.

NPL coverage ratio also weakened to 34.5% (FY15) from 42.1% (FY14) which is among the lowest within the banking sector.

Outlook: Refocus on Local Currency Business

The company’s management is aggressive to tap into new opportunities, outside their core business. They are currently in talks with relevant Kenyan government officials in order to participate in annuity financing framework. We opine that this will drive their interest income thus a driver for their top line.

The company’s liquidity ratio rose to 73.7% (FY15) from 41.4% (FY14). This resulted from high investments in marketable securities and growth in customer deposits. This was mainly driven by the attractive interest rates in 3Q15. The rates have relatively stabilized, thus the bank could possibly be engaging in reallocation of their instruments, which may result to a decline in the liquidity ratio.

The key growth areas for the bank are; increased focus on transactional banking, local currency business, raising cheaper deposits and investing on their mobile and internet platforms.

Valuation;

The share is currently trading at P/E and P/B of 6.93x and 1.03x in comparison to Tier 2 bank’s industry average of 6.77x and 1.24x- indicative of an upside in returns. We issued a Hold recommendation with a fair value estimate of KES 91.33. The company announced a final dividend of KES 6.15 with the book closure slated for 13th May 2016. This translated to a dividend yield of 7.15% and a payout ratio of 50%.

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