Likely easing of cost of risk in H2 bodes well
- Post roll-over to 2018, keeping Neutral rating: We have rolled over our price target for Stanbic IBTC (Stanbic) to 2018, increasing our target by 56% in the process to N39.2. Apart from the roll-over effect, the other driver behind the marked uplift is a 17% average increase to our 2017-18E EPS forecasts. Although the bank’s Q2 2017 earnings missed our forecasts (PBT by 29%, PAT 44%), our earnings upgrade reflects the strength of the pre-provisions (and opex) result. Going into H2, management is confident that loan loss provisions will ease because of recoveries from an oil and gas exposure which was classified as a result of its reliance on the Forcados pipeline; the pipeline was out of service for most of last year but is now operational again. Although our cost of risk estimate of 5.6% for 2017E is closer to the upper end of management’s guidance (4-6%), the changes to our revenue estimates and the implied run-rate for cost of risk implies that the H2 quarterly PBT should be better than the N18.6bn the bank delivered in Q1. And more importantly, Stanbic should deliver a full year ROAE of around 35%, significantly better than the overly conservative ROE guidance of 18-20%. Given the run the shares have had this year already, they are trading close to our new price target. As such, we retain our Neutral rating.
- Negative surprises in provisions and opex weighed on Q2 PBT: Stanbic’s Q2 2017 PBT and PAT grew strongly, by 94% y/y and 169% y/y respectively. The results were driven by a 43% y/y growth in pre-provision profits. This growth was underpinned by an 80% y/y expansion in funding income and, to a lesser extent, a 17% y/y increase in non-interest income. The positives on these lines were strong enough to offset increases of 72% y/y and 18% y/y in loan loss provisions and opex respectively. Further down the P&L, PAT grew by 169% y/y, thanks largely to a 43% y/y reduction on the minorities interest line. Compared with our forecasts, PBT and PAT missed by 29% and 44% respectively due to negative surprises in loan loss provisions and opex. Sequentially, the results showed a marked departure from the y/y trends. PBT and PAT declined by -43% q/q and -60% q/q respectively. Loan loss provisions and opex which increased markedly by 219% q/q and 24% q/q underpinned the sequential decline in earnings. These negatives offset the 9% q/q increase in pre-provision profits. In terms of contributions from the revenue lines, funding income which grew by 17% q/q was the major driver. Non-interest income came in flattish on a q/q basis.