Stanbic IBTC Holdings Plc

STANBIC IBTC HOLDINGS PLC

Ticker:                            STANBICNature of Business:      Other Financial InstitutionsLocation :                              Nigeria
Recent Price:           NGN45.10    52-Week High/Low: NGN52.90/29.00Estimated Fair Value:      NGN39.40-NGN46.36
Expected Return:      22.1%Consider Buy:                   Below NGN42.88Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Strong

Company Overview
Stanbic IBTC Holdings Plc (STANBIC) commenced merchant banking in 1989 as Investment Banking and Trust Company Limited and became a universal bank in 2002.  It was converted to a public company in 2005 and its shares were listed on the Nigerian Stock Exchange (NSE) in the same year. Thereafter, IBTC Chartered Bank Plc emerged from the amalgamation of Investment Banking and Trust Company Limited, Chartered Bank Plc and Regent Bank Plc. Its merger with Stanbic Bank Nigeria Limited gave rise to Stanbic IBTC Bank Plc.

The company adopted a holding company structure in line with the regulatory requirement for banks to divest from non-banking subsidiaries. Thus, a holding company, Stanbic IBTC Holdings Plc, was incorporated in Nigeria on 14th March 2012. The holding company was quoted on the Nigerian Stock Exchange in November of the same year.

STANBIC is a full-fledged financial services group that provides services such as banking, pension management, asset management, stockbroking, insurance brokerage and trusteeship. The business is divided into three segments which are personal and business banking, corporate and investment banking and wealth management. Standard Bank Group through Stanbic Africa Holdings Limited holds 67% of the shareholding of STANBIC. Standard Bank Group started offering banking services in South Africa, its headquarters, in 1863. It presently operates in twenty African countries.

Mr.  Basil Omiyi succeeded Mr. Atedo Peterside, the founder, as chairman in 2017. Dr. Demola Sogunle held various positions in the Group before his appointment as chief executive officer of STANBIC in 2020. He replaced Yinka Sanni.

Investment Thesis
Stanbic IBTC Bank Plc and Stanbic IBTC Pension Managers Limited are the main contributors to the earnings of the group. The company, which started as a merchant bank, has considerable expertise in corporate and investment banking.  The management's effort to aggressively penetrate the retail end of the market through its personal and business segment (PBS) is laudable. The PBS serves individuals and small-to-medium-sized enterprises and is a lucrative part of the market; it is responsible for a sizeable portion of net interest income.  However, penetrating this segment of the market has been at a high cost.  STANBIC  has been finding it difficult to consistently make a profit from this part of the market. This has led to the creation of more risk assets and reduced the quality of the company's loan portfolio.

The loan portfolio has been grown cautiously. STANBIC has been attracting cheaper deposits. Total deposits have been increasing by 17.6% while gross loans have grown by 18.5% over the past three years. STANBIC may have to borrow in order to take advantage of the opportunities in the market. However, the debt obligations, coupled with untoward exchange rate movement, would weaken its net earnings.

The group benefits from the goodwill of its non-banking subsidiaries, such as Stanbic IBTC Pension Managers Limited, to propel its profits. Profit After Tax (PAT) has grown by 21.9% in the past seven years. STANBIC has a manageable debt level at present.

Valuation
We arrived at a value ranging from NGN39.40 to NGN46.36 per share using our valuation models.  We expect investors who buy the stock of  STANBIC to earn a return of 22.1% comprising dividend yield and price appreciation.

Financial Overview
Gross earnings of NGN234.4 billion were marginally larger than NGN233.8 billion of the prior year. However, gross earnings have gained 11.2% over the past seven years. Net interest income worsened by 4.7% compared to a 0.5% decline of the previous period. Net interest income fell to GNG74.2 billion notwithstanding the 25.9% decline in interest expense in the year under review.  A drop in interest rate on loans had a negative impact on net interest income. The corporate and investment banking segment contributes the largest share of gross revenue and produced over 50% of revenue in 2020. The personal and business banking division had a 26.2% year-over-year drop in revenue and recorded a Loss After Tax of NGN 9.6 billion as against a PAT of NGN2.3 billion in the earlier year.

Fee and commission revenue was more or less flat at NGN75.2 billion.  But a 14.7% decrease in fee and commission expense resulted in a 1.1% boost in net fee and commission income. The wealth management business segment is responsible for most of the net fee and commission income. The wealth management segment made a PAT of NGN24.4 billion which was 6.1% better than the prior year’s figure. Its PAT margin was 46.9%, up from 45.6%. The segment engages in asset management, insurance brokerage and trusteeship. Moreover, this segment is less capital intensive and contributes significantly to profitability. Corporate and investment banking had the highest PAT margin of 61.1% (2019:56.3%).

STANBIC’s PAT leaped by 10.9% to close at NGN83.2 billion; this was an improvement on the prior period when PAT only added 0.8%. There was a 4.2% rise in Profit Before Tax (PBT). The net interest margin has decreased for three straight years. Both PBT and PAT margins added 1.5% and 3.4% to end 2020 fiscal year at 40.4% and 35.5% respectively. Return on Average Assets was 4% at while Return on Average Equity closed at 25.8%.

Loan expansion has not slowed. Gross loans were expanded by 18.5% compared with 19.7%% growth of the year before (2018:13.1%). Loan loss provision was 4.6% of gross loans. Both liquidity ratio and Capital Adequacy ratio (CAR) of STANBIC exceeded the regulatory requirement. CAR was 24.8% while the liquidity ratio was 148.9% at the end of the year 2020. STANBIC is not illiquid and its long-term solvency is not questionable.

Business Risk
STANBIC has to invest in technology in order to benefit from the digital economy. It is susceptible to competitive pressure from both traditional financial institutions and financial technology (FINTECH) companies in the provision of financial services. Net interest margin may dwindle down because STANBIC may have to expand its loan portfolio at a lower interest rate. In addition, the company operates in a highly regulated industry and faces regulatory and exchange rate risks. These would make its earnings vulnerable.

Recommendation: Hold

Earnings Chart of Stanbic IBTC Holdings Plc

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