Stanbic IBTC Holdings: From High Growth To Standstill
Stanbic IBTC Holdings Plc lost all the flying speed with which it grew profit at an average of 67.5 percent for the preceding three years to 2018. The bank closed the 2019 operations with after tax profit flat at N75 billion.
The speed breakers came from both disappointing earnings and rising costs just as highlighted in our outlook for the bank at the end of the third quarter.
The bank’s management accounts for the full year ended 2019 shows gross earnings of N234 billion, quite on target with our forecast of N236 billion for the year. Also, the bank’s closing bottom-line figure of N75 billion is only slightly better than our forecast of N72 billion.
Stanbic IBTC Holdings was able to grow profit in the preceding year by cutting cost in the face of only a moderate increase in revenue. Revenue growth remained weak in 2019 while cost-saving opportunities were limited. Interest earnings were flat while non-interest income that spurred revenue growth in 2018 slowed down for the second year.
Another speed breaker is cost of funds, which grew ahead of the flat interest income in the year and claimed an increased proportion of earnings. That caused a slight decline in net interest income to N77.8 billion at the end of the year. There was however a containment of interest expenses in the final quarter compared with the rapid increase recorded in the third quarter.
A major loss of customer deposits seen at the end of the third quarter followed the bank to full year. The bank lost about N170 billion in customer deposits at the end of the year, closing at N638 billion. Management tried to make up for the loss of customer deposits by raising inter-bank borrowings by 56 percent to N249 billion. That was another strong expansion of dues to other banks for the second year.
Against the loss of customer deposits, management raised customer lending volume by 23 percent to over N535 billion at the end of 2019. This happened at the expense of investments – which management collapsed to the tune of over 61 percent to N155 billion.
This is a major restructuring of the bank’s asset portfolio from the 2018 closing when both customer credit and investment securities stood in the same region of N400 billion. The restructuring to boost private sector lending is in line with the regulatory policy of increasing loan-deposit ratio.
By far the major speed breaker for the bank in 2019 is a dry up of loan recoveries that powered profit growth in 2018. The bank returned to a net loan loss expenses of N1.6 billion in the year from a net write-back of N2.9 billion in 2018.
Management was, however, able to prevent profit from dropping in 2019 by keeping operating expenses in check. With a cut in personnel expenses, the bank was able to keep total operating expenses down. Operating expenses had slowed down drastically in 2018 and extended to a decline in 2019.
Stanbic IBTC Bank closed the 2019 operations with gross earnings of N233.8 billion – an increase of 5 percent over the 2018 figure. Interest income edged up by 1.7 percent to N120 billion during the year, better than a decline of about 4 percent in 2018. Earnings weakness reflects a drop in investment assets, which reduced the combined lending and investing portfolio from N841 billion at the end of 2018 to N690 billion at the end of 2019.
Cost of funds slowed down in the final quarter from a 10 percent increase at the end of the third quarter to 6 percent at full year. It still claimed a slightly increased share of interest income, leading to a slight decline in net interest income to N77.8 billion. The challenge for the bank is using high cost due to banks to meet the funding gap created by loss of customer deposits.
A major challenge in the final quarter is a shift from a net write back position of loan impairment expenses of N90 million at the end of the third quarter to a net loan loss expense of N1.6 billion. The expense however remains quite low compared to previous credit losses.
This is in line with our view at the end of the third quarter that “the bank is likely to shift to moderate net loan impairment expenses in the final quarter”. The relatively low credit loss expense for the year helped the bank’s management to defend the bottom at the end of the year.
Stanbic IBTC Holdings ended the 2019 operations with an after tax profit of a little over N75 billion, which is flat on the N74.4 billion closing for 2018. It was a cooling off year for the bank after sustaining a cruising speed growth for the preceding three years. The bank closed the 2019 financial year with net profit margin down from 33.5 percent in 2018 to 32 percent.
A sustained slowdown in loan impairment expenses provided the spur for profit advancement in the preceding years. A change of trend back to growing net credit loss expense broke the speed in 2019.
Stanbic IBTC Bank earned N6.92 per share at the end of the 2019 financial year, down from N7.04 per share in 2018. The bank gave an interim cash dividend of N1 per share at the end of half year operations with an option of converting it into scrip. A final dividend is expected to be announced with the audited report.
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