STANBIC IBTC: Valuation still attractive despite weak earnings outlook; BUY rating maintained

Stanbic’s Profit before tax increased 3% y/y to N90.9bn, slightly ahead of our FY 2019 estimate of N90.4bn. The growth in Pre-tax Profit was driven largely by the increase in Trading Income (up 16% y/y) amidst the moderation in OPEX (down 2% y/y).

RoAE stood at 27.3% in FY 2019 compared to 34.5% in FY 2018. In view of the deterioration in macro conditions caused by COVID-19 and the unprecedented decline in oil prices, we expect Stanbic’s earnings to be pressured by higher impairment charges given the substantial increase in loan book in FY 2019 (up 23% y/y). We forecast cost of risk of 0.9% (FY 2018; 0.2%) and NPL ratio of 5% in 2020e (FY 2019; 3.9%).

We also expect Interest Income to be pressured by slower growth in the loan book given frail macro conditions and low asset yields.

Similarly, we expect the momentum in Non-Interest Income to be capped by regulatory-induced fee cut on electronic channels, weaker trading income on fixed income instruments, and potentially lower volume of capital market transactions, which could weigh on brokerage and financial advisory fees in the Corporate and Investment Banking (CIB) division. Overall, we estimate Pre-tax Profit will decline by 11% y/y to N80.7bn in 2020e while ROAE will decline to 20.3% from 27.3% in FY 2019.

We have updated our model and the overall impact is a steep cut in our target price to N39.52/s from N58.58/s previously, reflective of the impact of downward adjustments to our PBT estimates over our forecast years (2020e-2024e) and a higher cost of equity given the elevated risk in the economy.

We, however, maintain our BUY recommendation as we believe the valuations remain attractive (P/BV of 1.0x and P/E of 4.0x). Our target price is based on an implied 1.23x PBV multiple applied to our forecast 2020e BVPS of N32.1/s.

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