StanChart released 3Q23 earnings, posting an 11.8%y/y growth in EPS to KES 25.77. The performance comes on the back of a 34.5%y/y climb in net interest income (NII) to KES 21.2bn as non-funded income (NIR) dipped 6.6%y/y to KES 8.2bn.
NII growth was boosted mainly by a 40.9%y/y growth in income from loans and advances to KES 12.9bn in what we attribute to upward repricing of loans following the recent CBK rate hikes – subsequently, yields on loans surged 283bps to 12.1%.
Loan book growth was marginal at 5.5%y/y to KES 143.6bn (though down 1.3% likely following early repayment of a loan by one of its large borrowers – Safaricom).
Interbank lending also boosted NII, up 170.4%y/y to KES 4.0bn as peers faced liquidity pressures. Notably, interbank rates touched decade highs of 17.4% within the quarter.
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NIR drop was mainly attributable to a KES 2.3bn drop in other income, linked to mark-to-market losses on government securities as the lender liquidated 49.9% of its government securities holdings to KES 56.4bn.
The divestment was made to de-risk the lender following Kenya’s credit downgrades by various rating firms within the year. This was the second successive quarter in which the lender posted mark-to-market (MTM) losses on the government securities book.
The bank has noted that it made the move to invest in higher-yielding customer assets (related party placements which were up 44.8%) and other short-term commercial assets (short-term T-bills as securities held for dealing nearly quadrupled). Positively, FX income climbed 49.8%y/y to KES 6.3bn as the firm provided dollar liquidity.
Operating expenses before impairments (OPEX) rose 19.6% to KES 13.9bn on a 19.3%y/y uptick in staff costs as well as a 22.8%y/y rise in other operating expenses owing to the elevated inflation and higher digital dollar costs. The bottom line was also dragged by a tripling in loan loss provisions as the bank envisions asset quality deterioration, especially in the retail segment following the recent upward repricing on loans.
Key Positives
- Asset quality improvement – the lender’s NPL ratio tapered down 1.0 percentage points y/y to 14.4% from 15.4%. The lender clawed back some of the provisions made in 1H23, resulting in a negative 0.6% cost of risk. However, cumulatively, the cost of risk climbed 108bps to 1.7% – a reflection of the sentiments around the weakening macro-environment.
- Cost to income (CTI) remained fairly stable, improving slightly from 47.4% to 47.3% despite the jump in growth in OPEX.
- The lender maintained its aggressive stance on shunning expensive deposits, reflected by the 10.0%y/y drop in interest expenses. The bank is arguably the only lender to post a decline in interest expenses in 3Q23 (similar to 1H23).
- In line with the previous mention by management, the bank dollar debt owed to the Group declined 73.7%y/y to KES 3.8bn, paid down from retained earnings.
Key Negatives
- The bank may face a challenge in retaining deposits given its low rates on deposits in the current elevated rate regime. As at 2Q23, deposits declined 6.4%q/q. Notably, deposits in 3Q23, rebounded 5.3%q/q as the bank embarked on promotional offers on deposits.
- The lender is currently facing a KES 30bn litigation cost in a suit filed by former employees, back in 2009, regarding their pension. We believe the bank has appealed the High Court ruling though there is no indication of any provisions for contingent liabilities hence this may impact dividends in the event they lose the appeal. This potential litigation cost accounts for 2.5x of FY22 net earnings or 63.8% of the bank’s core capital.
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Outlook and Recommendation
An interim dividend of KES 6.00 has been announced (similar to last year), with book closure slated for Thursday, 14 December 2023. The bank’s new mobile lending product is set to be launched soon (initially targeted for December) as mentioned in the dailies. The lender plans to take on Fuliza and M-Tiwari with a 30-day 6.58% monthly short-term financing to clients. These rates will be lower than the dominant NCBA’s M-Tiwari and KCB M-Pesa loan rates which stand at 9.0% and 8.8% respectively.
The product was in the testing phase and is set to launch next month though it is not immediately clear when it will be rolled out. Asset management business growth is steady, up 21% to KES 160bn – this should continue boosting NIR. Growing customer numbers remain key as the bank seeks to boost its non-funded income contribution from the current 27.9%. We like the proactive clean-up by the bank (de-risking government securities portfolio, paying down debt, increasing provisions).
The bank is trading at a trailing 1.12x P/B (tangible) and a trailing P/E ratio of 4.51x – a premium to the industry’s 0.6x P/B and 3.4x P/E. The counter is trading at an 86.7% P/B premium. Having gained 12.4% in the past 12 months, the stock has outperformed both the NASI (-29.6%) and the NSE 20 (-10.6%) indices. We like the counter as a dividend stock, currently offering a dividend yield of 13.7%.
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