Stock Highlight: CFC Stanbic Holdings

CFC Stanbic Holdings Limited (NSE: CFC), announced their HY16 results for the period ended 30^th June 2016, with the following highlights:

Analyst View on the Stock:

We issue an ACCUMULATE recommendation on the stock based on a fair value of KES 94.65 per share vis-à-vis the current market price of KES 80.00 per share, offering an upside potential of 18.31%. The company’s growth will continue to be driven by the re-balancing of both their corporate and personal banking business.Going forward, the bank focuses on leveraging on its personal business segment to increase client-driven NIR. Given its diverse product offering, strategic market positioning & being part of a global brand, CFC Stanbic’s value proposition is a franchise capable of addressing the needs of an expanding sophisticated SME client base (forms the next growth frontier). CFC Stanbic Group trades on a trailing P/E and P/B of 5.78x and 1.14x respectively, against industry averages of 6.08x and 1.15x respectively for banking sector, indicative that the stock is undervalued  on both counts.

Performance Highlights:

PBT Grew by 33.9% and PAT was up by 29.8% to KES 2.36 billion…

• CFC Stanbic Holdings announced a 29.8% rise in after- tax profits to KES 2.36 billion, buoyed by a 33.1% increase in interest revenue to KES 8.83 billion from KES 6.63 billion in HY15.
• Net interest income advanced by 24.6% to KES 5.40 billion on the back of an 8.3% growth in its loan book. Overall, NIMs improved to 6.08% (HY16) from 5.57% (HY15) as the net interest income grew.
• As at 30^th June 2016, non-funded income contribution to total income declined marginally to 41.4% (HY15- 41.7%), attributable to a faster growth in total operating income compared to non-interest income.

Cost-to-Income Ratio Dipped to 51.5% from 59.9% previously…

• Loan loss provision recorded the largest increase of 202.72%, thus pushing up operating expenses by 18.48% to KES 5.61 billion. Banks continue making higher provisions for bad loans, on account of the change in tact for reporting bad loans as issued by the regulator. This has seen lenders post higher NPLs than previously. Other costs came as a result of the upgrade of their core banking system.
• The higher operating income however resulted in a lower CTI ratio, despite the escalated operating expenses which is quite positive for the bank. The bank targets to bring down its CTI to >50% in the next two years.

Book Quality Deteriorates to 5.4%…

• The bank’s book quality worsened from 3.9% (HY15) to 5.4% (HY16) largely attributable to the surge in gross non-performing loans. The banks had to restate their NPLs in accordance to CBK’s guidelines. NPL coverage ratio rose to 17.6% (HY16) from 8.5% (HY15) which is among the lowest within the banking sector.

Outlook: Focus Shifts to Personal Banking…

• The Corporate and Investment banking has predominantly been a key driver for revenue as it contributes to 64% of the banks total income. However the banks move to grow its personal banking division will see the firm accelerate its growth.
• Their mobile banking platform is set to reduce costs associated with branch transactions.
• CFC Stanbic Holdings continues to gain traction in re-balancing its corporate and personal businesses – in FY15 corporate segment contribution to advances, deposits and total income stood at 53%, 49% and 63.8%.