Company Analysis

Stanbic IBTC: When Non-Interest Income Boosts Earnings

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The management of Stanbic IBTC last week released its belated numbers for the audited 2015 full year, as well as the unaudited results for the first, second and third quarter, even as a statement by the board announced an amicably resolution of all outstanding issues with the Financial Reporting Council of Nigeria (FRC).
The Monday, October 25, 2015 announcement barring four directors of Stanbic IBTC Holdings, including Atedo Peterside, its founding managing director and Mrs Sola David Borha, as well as officials of KPMG Professional Services, delayed the release of the group’s earnings report.
Despite the late publication of the earnings report, the company’s performance in the period was impressive, especially the quarterly numbers trending up as reflected on the profitability ratios. The nine-month scorecard revealed growth in top and bottom-lines to consolidate the quarterly results made available at the same time.
In the 2015 audited numbers, there was a 9.8% rise in gross earnings to N114.62 billion from N104.42 billion, from which profit after tax soared 48.6% to N20.2 billion from N13.6 billion in 2015.
The impairment loss on financial assets for the period increased to N15.32 billion from N12.51 billion in 2015, with operating cost slowing down profitability as provision and expenses were up by 22% and 10% respectively.
These notwithstanding, the group has shown resilience by remaining green, despite the weak economic down sides and risk exposure, with all sectors of the system already in recession and moving below zero level. This is made worse by over regulation of Nigeria’s banking industry, added to the continuous tightening of monetary policy by the apex bank.
The marginal growth in top line is linked to the company’s dexterity in navigating its balance sheet towards areas of opportunity within the review period.
Third quarter Earnings Per Share (EPS) was up by 49% to N2.02 from N1.36 in 2015. The up-trend in the financials so far in the year has not supported the share price but the shareholding structure. Its shares currently trade at N14.21 per share, slightly below its book value of N14.48 as at third quarter report in 2016, which indicates that
the stock is marginally undervalued. It therefore offers opportunities, hence the need for discerning investors to fix their gaze on it. The Price to Book Value currently stands at 0.98 and Price to Earnings Ratio is 2.35x.
Investors’ waiting period has reduced as a result of growth in the company’s share price.

Date Released October 29, 2015 December 22, 2016
Price
The holding company reported impressive year-on-year margin movements with Net Interest Income Margin increasing to 34.10% from 31.54%, while pre-tax profit margin jumped to 22.41 from 14.72% in 2015. Net Income Margin also improved to 17.58% from 12.99% in 2015. Return on Equity stood at 12.06% as other profitability ratios for the period were in the green to testify real improvement in the company earnings power. As showed in the table above

Stanbic IBTC’s price action has within the year oscillated to be trending high to form a symmetrical triangle, a chart pattern that indicates continuation or reversal of trend. The strong support level of the company in the up and down movement is N13, the attempt to break down the triangle in July failed due to retracement on low price sentiments and attraction.
Traders should watch out for breakout of the yellow top line for continuation up trend to first resistance at N16 and second resistant at N16.48 or reversal to first support level at N13.25 and second support price of N12.98. The momentum of the trend on weekly basis is weak below 20 ADX.
Forecasts
Our FY 2016 gross earnings forecast for the group is N142.80 billion, representing a 2.34% improvement, relative to FY2015, while our net income estimate for FY2016 is N22.56 billion, which translates to a 19.42% improvement on FY 2015. This yields an EPS of N2.26 and a forward P/E of 5.12X.
The financial sector still remains in the eye of the storm as 2016 winds down. We expect more loan loss provisions, as many sectors are reflecting the current economic situation facing the nation now.
The policy of government since the beginning of this year has triggered rising cost of borrowing and the pressure on net interest margins. Our net book value estimate for Q3 is N144.84 billion, which brings forward Price to Book Value to 0.98x.
We also expect sluggish growths in both deposit from customers and loan book for FY2016, which means that the lender’s success in 2016 will be determined by the efficiency of balance sheet deployment and the potency of its risk assessment framework.
Analysts Opinion/Recommendations
The shares of Stanbic IBTC is fairly priced with focus on our FY2016 estimates. The stock is currently trading at a 2% premium to it book value of N14.48.
We are optimistic that despite the tight operating environment in Nigeria with the implementation of the Treasury Single Account policy of the Federal Government that tightened the liquidity condition in the Nigerian financial system.
The steep tank in oil prices poses a major threat to asset quality for most Nigerian banks as a result of their exposure to the sector and the tight currency control policies of the Central Bank of Nigeria (CBN), which have weakened the earnings capacity of many companies operating within the nation’s financial market. Stanbic IBTC has the capacity to weather the storm, especially with the oil price recovery and the proposed fixing of the power sector by the Federal Government, in collaboration with the World Bank.
Although we expect gradual recovery in the market in the New Year, it is our opinion that share prices will adequately compensate for any unexpected down-side risks.
We are also impressed with the steady rise in the bank’s Book Value position over the last few years. However the company must be proactive with its Return on Equity (ROE) growth.
All said, we have a BUY recommendation on the shares of Stanbic IBTC. On the strength of its quarterly earnings, especially the third quarter numbers, the possibility of dividend payment in the range of N1.00 to N1.15 is high. Watch out.

IBTC Holdings PLC is a full service financial services group with a clear focus on three main business pillars – Corporate and Investment Banking, Personal and Business Banking and Wealth Management.
Stanbic IBTC Bank legally became part of Standard Bank Group 24th August 2007. The Standard Bank Group merged its Nigerian operations, Stanbic Bank Nigeria with that of IBTC Chartered Bank PLC. Stanbic IBTC Bank is a major financial service provider engaged in personal banking, business banking, credit cards, corporate banking, non-interest banking and wealth and investment banking in Nigeria.
The management of Stanbic successfully built its financial figures through 2015 despite the incident with FRC. Investors’ responses to such performances were MIXED as share price oscillated to close lower at the last trading day of 2015. The interim dividend of 90 kobo did not support price then, before the recent final dividend of 5 kobo to make total payout of 95 kobo for 2015. Performance indices fairly price each unit of Stanbic IBTC shares at N17.00.
Performance in Four Years (2012-2015)
Stanbic IBTC has been resilient as mentioned earlier, despite the tight economic conditions especially since the crash in oil prices and the resultant pressure on disposable income, which may have been the major restraining factors for the creation of risk assets during the review period.
Gross earnings for the period grew by 52.42% to N140.03 billion from N91.87 billion in 2012. The profitability level for this period was mixed, due to CBN rules governing different provisions. The bottom-line for same period was down marginally by 9.10% to N18.89 billion from N20.77 billion in 2012, after hitting a high of N34.46 billion in 2014 from N32.07 billion in 2013 as shown in the table below.
The bank also grew net assets for the period by 32.1% to N128.97 billion from N97.63 billion in 2012.

VALUATION ANALYSIS
Based on our analysis, the stock is currently trading at a 14% discount to our estimated fair value of N17 per share, with a 12-Month investment horizon.
In arriving at our fair value for the stock, we focused on the historical financial performance of the stock and our expectations for full year 2016. Our Fair Value for the company’s shares was calculated using the Price to Book Value method of valuation as well as the Dividend Discount Model, comprising our expected dividend estimate for the company to adjust for the risk of investing in the Nigerian Financial market. We have placed a POSITIVE on the stock.

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