Standard Chartered Bank (StanChart) delivered 43.8 percent y/y growth in FY16 EPS to 25.85 (a better performance than the 7 listed banks that have announced).
With operating income before provisions up 12.6 percent y/y, a 52.1%y/y decline in loan loss provision boosted performance but the coverage is still below 50 percent and NPLs remaining elevated non-Interest Revenue (NIR) on the other hand recorded a strong growth of 18.5 percent y/y.
Dividend declared was 20.00 shillings compared to 17.00 shillings in 2015.
The lender had the following positives:
- Strong NIR growth of 18.5 percent y/y. Aided by 21.8 percent y/y and 58.3 percent y/y growth in FOREX income and other income respectively. Fee and commission income grew just 9.3 percent y/y. At 30.5 percent, NIR to total income was in line with 5 Yr. Historical average and FY15 sector average of 31.8%. Unlike Tier 2 banks, off-balance sheet assets were up 7.9 percent y/y to 35.4 percent of total assets and 72.2 percent of loan assets. This, together with the fact that StanChart’s traditional strength has been cross-selling to clients, have been the key supporting elements of NIR. However, with 5 Yr. historical of off-balance sheet assets to total assets at 45.1 percent, StanChart’s market dominance appears to be facing competitive pressure from fellow Tier 1 banks targeting the segment. This will not relent going forward with banks now bullish on pursuing NIR.
- Positive balance sheet growth- Loans +6.6%y/y, deposits +8.5%y/y. This comes after two consecutive years of balance sheet contraction. Following a surge in NPLs in FY14, StanChart has appeared to be reverting to its conservative stance with Loans-to-total assets now at 49%, a 5-year low. Resultantly, liquidity rose to 56.3% from 53.7% in FY15. With the rate capping law in place, we expect retention of this strategy as NPL relief remains a long shot.
- CTI remained stable at 44.7%. Despite OPEX growing 13.0%y/y, CTI remained below FY15 industry avg. of 47.4%. In FY16, StanChart indicated that it will transfer some of its services to one of the global shared services centers in India. This will result in staff cuts going forward. There being no expected cost pressure going forward, we expect CTI to remain below industry average.
- Stable NIM at 8.9%. 4Q16 NIM was down 80bps q/q to 7.7%. While Cost of Funds (CoF) remained at 3%, loan WAIR shed 150bps to 11.1%. With StanChart operating with below industry levels of interest earning assets which already do not attract a significant premium, we expect minimal pressure on CoF. On lending, NIM sustainability will heavily rely on high yielding Government securities considering that borrowers are unlikely to accept paying higher rates.
On the negatives the lender had the following:
- NPL ratio still elevated, up 40bps y/y to 12.3%. NPL ratio rose for the fifth straight year to 12.3%, which is above the industry average of 9.3% as at October 2016. Disappointingly, coverage was below 50%. Though StanChart has not had historically high levels of coverage like DTB, we expected the continued loan book weakening to result in boosted coverage levels. Considering realizable value of securities held fell 36.2%y/y, the coverage levels remain a concern to us.