Standard Chartered Bank’s EPS Declines by 20.5 Percent in Q1 Results
By Soko Directory Team / May 24, 2017
Standard Chartered Bank Kenya released 1Q17 numbers marking a 20.5 percent decline in EPS to 5.98 shillings. Unlike the rest of the sector, the bank marked a slight improvement in Net Interest Margin (NIM) q/q.
Performance was however weighed down by a decline in Non-Interest Revenue (NIR), an uptick in costs and loan loss provision. Disappointingly, Non-Performing Loans (NPL) levels showed no improvement.
Some of the positives from the results were:
- NIM was up 1 bp q/q to 7.8 percent.Unlike the rest of the sector which took a hit on NIM, StanChart had improved levels on the back of an 110bps improvement in loan WAIR. The cost of Funds (CoF) remained unchanged at 3 percent. Considering the 4.8 percent q/q decline in advances, we believe SCBK revised its customer Loan WAIR upwards during the quarter. This is likely to impact loan book growth going forward given the sector is competing through rates undercutting.
- Marginal erosion on Cost to Income (CTI). CTI closed at 44.1 percent Vs. the bank’s historical average of 42 percent. However, there was a notable rise in staff costs (+8.9 percent y/y) and other operating costs (+5.7 percent y/y). StanChart is planning to have staff restructuring this year though management has not indicated the expected impact on the numbers or when the associated costs will be booked. Bearing that in mind, we expect upward pressure on CTI going forward.
- Conservative balance sheet strategy.As at 1Q17, the bank’s loans to total assets hit a seven-year low at 42.6 percent. Loans and deposits were up 6.5 percent y/y and 11.1 percent y/y (respectively). In our view, we like the strategy given the significant loan book weakening over the last three years and the margin dilutive nature of aggressive loan book growth under capped rates. Notably, with management engagement remaining low, strategy visibility remains unclear.
The results did not lack negatives:
- NPL ratio still elevated at 13.1 percent.This was from 12.3 percent in 4Q16 and 14.0 percent in 1Q16. It remains among the highest NPL ratios in the sector. On an absolute level, there was barely any improvement as Gross NPLs were down 0.3 percent y/y (+2.2 percent q/q). Coverage levels are still hovering around the 50 percent level despite a 6.0 percent y/y rise in loan loss provision. Given the significantly weakened loan book, we expected StanChart to respond with much higher coverage levels compared to historical average (about 45 percent).
- NIR down 10.1 percent y/y. Of the key NIR lines, only fees and commission income was positive, up 16.9 percent y/y mainly on other fees. This wasn’t a surprise us given that StanChart has traditionally had higher than industry average cross-selling ratios and profit per customer. FOREX income and other operating income were down 16.3 percent y/y and 48.7 percent y/y (respectively). Notably, off-balance sheet assets to total assets declined to 37.3 percent from 43.6 percent in 1Q16 indicating a possible slowdown in import-export business which would partially explain the cut in FOREX income.
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