Standard Chartered Bank is a Buy Today for a Fair Value of Ksh. 167.2

Standard Chartered Bank of Kenya Plc (NSE: SCBK) announced a 50.9 percent y/y rise in 1H21 EPS to KES 12.91 from KES 8.56.

The improved performance is mainly due to an increase in Non-Interest Revenue (NIR) (+13.5 y/y) as well as a decline in pre-provision expenses (-5.5 percent y/y).

Loan loss provisions fell significantly by 60.7 percent y/y to KES 638.5Mn as gross non-performing loans (NPLs) rose to KES 22.9Bn (+9.4 percent y/y).

Net Interest income (NII) fell 3.0 percent y/y to KES 9.1Bn as the loan book contracted 3.0 percent y/y (+10.5 percent q/q) to KES 130.3Bn. Investment in government securities dropped marginally by 2.5 percent y/y (+0.5 percent q/q) to KES 98.7Bn as the Bank maintained a highly liquid balance sheet (70.1 percent).

Customer deposits rose to KES 278.2Bn (+8.5 percent y/y, +4.9 percent q/q) as the total assets stood at KES 345.6Bn (+5.6 percent y/y). Profit before Tax was reported at KES 6.8Bn, up 33.1 percent y/y.

Positives

1. Improved operational efficiency, Cost-to-income (CTI) at 47.3 percent: The cost to income (CTI) ratio improved by 391bps y/y to 47.3 percent. The improvement is mainly due to a 60.7 percent y/y drop in loan loss provisions to KES 638.5Mn as well as a 5.5 percent y/y drop in operating expenses before provisions to KES 6.7Bn.

Operational efficiency was further enhanced by a decline in staff costs to KES 3.2Bn (-3.8 percent y/y), with other operating expenses falling 11.9 percent y/y to KES 2.5Bn. As the management continues investing in the digitization of services, CTI is expected to be cushioned by the increased use of electronic platforms. As of the end of FY2020, 90.0 percent of the transactions were taking place on alternate channels.

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Neutral

1. Non-Interest Revenue up 13.5 percent y/y, subdued NII performance down 3.5 percent y/y: Non-interest revenue (NIR) contribution gained 13.5 percent y/y to KES 5.0Bn, supported by a rise in foreign exchange trade income to KES 1.7Bn (+14.8 percent y/y), with other fees and commissions rising 21.8 percent y/y to KES 2.6Bn. Fees and commissions on loans and advances however fell 7.6 percent y/y to KES 140.9M, attributable to loan book contraction (-3.0 percent y/y). Net interest income (NII) retreated to KES 9.1Bn (-3.0 percent y/y) on the subdued interest income from loans and advances at KES 5.7Bn (-9.6 percent y/y) and lower interest income on government securities to KES 4.6Bn (-2.8 percent y/y). Total interest expenses fell to KES 1.9Bn (-24.5 percent y/y) as the Bank targets cheaper customer deposits.

1. Flat Net Interest Margin (NIM) at 8.1 percent, (-8bps y/y): Total assets grew 5.6 percent y/y with deposits growing 8.5 percent y/y to KES 345.6Bn. Cost of funds (CoF) improved significantly to 1.5 percent from 2.9 percent in 1H20. However, the benefit of the lower CoF was eroded by the drop in yield on interest-earning assets to 9.6 percent in 1H21 from 11.2 percent in 1H20 due to its shrinking loan book.

Negatives

1. Weaker asset quality with NPL ratio at 15.4 percent (+148bps y/y, -104bps q/q): The NPL ratio worsened by 148bps y/y to 15.4 percent as the bank’s gross non-performing loans (NPLs) rose 9.4 percent y/y to KES 22.9Bn. The bank is however robustly covered with the NPL coverage ratio standing at 81.4 percent (+318bp y/y) with the cost of risk at 0.9 percent (lowest since 1Q20). A point of concern is that the NPL ratio has remained elevated above the sector average for the past 4 years (sector NPL ratio at 14.0 percent as of June 2021).

Genghis View

Given the bank’s conservative risk management strategy, the NPL ratio is expected to gradually ease off from its elevated levels. Dividend payment will also likely revert to pre-pandemic amounts on the back of improved earnings (was halved to KES 10.50 in FY20).

The bank’s wealth management business contributed 21.0 percent of revenue with assets under management (AUM) growing 90.0 percent y/y to KES 129.0Bn as of FY20.

As such, it may look into issuing loans backed by customers’ investments in mutual funds given the impressive increase in AUM.

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Stanchart is also seeking to venture into digital micro lending, credit card automation, and digitization of its Commercial Banking segment.

With the bank’s continued focus on digitalization as well as long term cost-cutting initiatives, it is expected that the Cost to income ratio will continue on a downward trend. And for this reason, Genghis recommends a BUY on SCBK at a fair value estimate of KES 167.20.