Unpacking Stanbic Bank Kenya's H1 Profits

Unpacking Stanbic Bank Kenya’s H1 Profits

By Soko Directory Team / Published August 9, 2024 | 9:48 am

Stanbic Holdings Plc has released its 1H24 results, marking a 2.3%y/y growth in EPS to KES 18.25. Net interest income (NII) climbed by 4.2%y/y to KES 12.6bn while non-interest revenue declined by 15.1%y/y to KES 7.6bn leading to a 2.3% increase in PAT to KES 7.2bn – as impairment and operating expenses fell.

The Board of Directors has recommended an interim dividend of KES 1.84 (+60.0%y/y) – subject to shareholder approval, with a proposed book closure of 2nd September 2024.

Stanbic Bank Kenya Ltd, the primary subsidiary of Stanbic Holdings Plc, posted a subdued 5.1%y/y rise in 1H24 net income to KES 7.1bn.

The lender’s performance was a result of a 5.4%y/y increase in net interest income (NII) to KES 12.2bn and a 13.5%y/y contraction in non-interest revenue (NIR) to KES 7.5bn.

The bank’s total NII surged to KES 24.5bn (+49.1%y/y), driven by income from loans and advances which surged to KES 18.3bn (+44.3%y/y) on higher interest rates in the period.

The lender’s loan book however contracted 2.4%y/y (-6.9%q/q), likely due to increased short-term lending and revaluation of the FCY loan book despite growth in LCY lending.

Notably, the lender’s oil and gas credit book is now mainly in local currency. A surge in interbank rates within the half, closing at 13.3% in 1H24 vs 10.2% in 1H23, saw the lender post a 1.9X rise in income from interbank lending to KES 3.5bn. Notably, interest expenses grew faster (+154.3%y/y) than interest income (+49.1%y/y).

Interest expenses attributable to customer deposits surged 2.0x to KES 10.9bn on the back of a 30.3% rise in customer deposits to KES 355.6bn amid a high-interest rate environment (estimated average deposit interest rate quickened to 6.3% vs 2.6% in HY23).

NIR was mainly dragged down by the decline in foreign exchange income (-21.9%y/y) to KES 4.7bn. We believe the base effect came off following a one-off high-value dollar transaction (Diageo deal), coupled with compressed foreign currency margins on the back of a better functioning interbank market despite higher FX volumes.

The bank recorded a decline in fees and commissions to loans and advances to KES 51.4mn (-40.1%y/y), which may be attributable to possible waivers as well as aspects of risk-based pricing.

Furthermore, other fees and commissions declined 4.9%y/y to KES 2.4bn, given part of the commissions earned in 1H23 were from the one-off transaction. Management noted that excluding this transaction, fee income grew 20%y/y on rising customer numbers (+18%y/y), and higher digital customer transactions (+9%y/y) amongst other drivers. As a result, the lender’s net interest margins (NIMs) contracted to 5.2% (a notable decline from 6.8% in 1H23).

Key Positives

Solid Return on Equity (ROE) at 20.6% despite a slight drop y/y coming from a higher 1H23 base.
Cost to income ratio improved y/y to 40.4% vs 42.9% in 1H23 (a slight decline q/q) partly driven by base effect from past investments and efficiency gains from automation. Operating expenses (before impairments) declined by 8.3% y/y in 1Q24.
Cost of risk softened to 1.2% in 1H24, from 1.7% in 1Q23 as loan loss provisions declined by 8.8% y/y to KES 1.9bn in 1H24. This points to possible recoveries and tighter credit controls to manage asset quality.
The lender’s liquidity ratio improved significantly from 35.8% in 1H23 to 52.8% in 1H24. Notably, total government securities rose by 19.5% y/y as part of its funding strategy.

Key Negatives

Capital strength from a total capital to total risk-weighted assets view softened by 100bps y/y to 16.4% – 190bps above the statutory minimum level (a slight improvement from 16.2% in 1Q24). This may however be attributed to currency appreciation and as well as the amortization impact on Tier 2 capital.
Rise in NPL ratio to 9.4% in 1H24 vs 9.2% (though a slight improvement from 9.4% in 1Q24). This quantum is however much lower than the industry average of 16.3%.
Net interest margin compression, exacerbated by the rising cost of deposits despite growing loan yields to record levels (est. avg rate of 14.7%) as the lender continues to implement its risk-based pricing model.

Outlook and Recommendation

We see growth opportunities for the lender in the medium term from regional trade business prospects through borderless banking, leveraging on its China Trade corridor, growing lending in target sectors (oil and gas, infrastructure, agriculture etc), and digital innovation to drive operational and cost excellence.

We anticipate growth in its Asset Management and Insurance Business to grow non-interest revenue as the bank positions itself to tap into its Personal & Private Banking segment. Management notes that its Asset management offering received regulatory approval from CMA and the lender is in the final stages of setting it up.

Additionally, the lender’s bancassurance arm is tracking well, posting a 20% y/y rise in PAT to KES 64m on increased penetration of its ecosystem. Stanbic’s South Sudan subsidiary posted an impressive +100%y/y jump in PAT to KES 190mn, driven by trade activity (Stanbic Holdings loans growth of +28.5%y/y vs Stanbic Bank -2.4%y/y in 1H24).

Management estimates foresee overall loan book growth at 14%-16% CAGR in the strategic period, with possible improvement in credit demand as the CBK gradually eases the CBR rate.

Stanbic Bank is now trading at a trailing 0.7x P/B (tangible) and forward P/E ratio of 3.8x – compared to the banking industry’s 0.6x P/B and 3.6x P/E. We view the counter as an income stock given the 60.0% increase in interim dividend as well as the lender’s strategic imperative to achieve a 60% dividend payout. We maintain our BUY recommendation, given the dividend play as well as the medium/long-term outlook of the lender.

About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system.Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

View other posts by Soko Directory Team