Valuation Summary

• We are of the view that Standard Chartered is a “buy” with a target price of Kshs 229.6 representing an upside of 38.3%, from the current price of Kshs 166.0 as of 29^th May 2020, inclusive of a dividend yield of 9.0%,
• Standard Chartered Bank is currently trading at a P/TBV of 1.2x and a P/E of 7.4x vs an industry average of 1.0x and 5.3x, respectively.

Key Highlight Q1’2020

• Standard Chartered recently restructured loans amounting to Kshs 8.0 bn equivalent to 6.2% of its net loans, which stood at Kshs 128.7 bn in FY’2019. Previously, the lender had also announced repayment breaks of up to 3 months on all loans as part of its efforts to cushion its customers from the ongoing pandemic.
• The bank recently launched the SC Mobile App which allows clients to buy and sell Treasury bonds and Treasury Bills through the app, and,
• Standard Chartered Bank recently announced the postponement of the proposed final dividend payments of Kshs 15.0 per share for FY’2019 that was scheduled to be paid on 28^th May 2020. The lender indicated that given that their 34th Annual General Meeting (AGM) which was to take place on 28^th May 2020, remained postponed, the payment of the final dividend would be delayed because approval of the final dividend payment would be at the AGM.

Income Statement

• Core earnings per share declined by 16.6% to Kshs 5.9, from Kshs 7.0 in Q1’2019, driven by a 5.6% decline in total operating income to Kshs 7.0 bn, from Kshs 7.4 bn in Q1’2019, coupled with a 5.7% rise in total operating expenses to Kshs 4.0 bn, from Kshs 3.8 bn in Q1’2019. The growth in core earnings per share was not in line with our expectations of a 0.3% decline, with the variance being attributable to the 5.6% decline in total operating income to Kshs 7.0 bn, from Kshs 7.4 bn in Q1’2020, against our expectations of an 8.7% increase,
• Total operating income declined by 5.6% to Kshs 7.0 bn, from Kshs 7.4 bn in Q1’2019. This was driven by a 6.5% decline in Non-Funded Income (NFI) to Kshs 2.2 bn, from Kshs 2.4 bn in Q1’2019, coupled with a 5.1% decline in Net Interest Income (NII) to Kshs 4.7 bn, from Kshs 5.0 bn in Q1’2019,
• Interest income was down by 4.3% to Kshs 6.1 bn, from Kshs 6.4 bn in Q1’2019. This was driven by 7.4% decline in interest income from government securities to Kshs 2.5 bn from Kshs 2.7 bn in Q1’2019, coupled with a 5.9% decline in interest income on loans and advances to Kshs 3.2 bn, from Kshs 3.4 bn in Q1’2019. Consequently, the yield on interest-earning assets declined to 9.4% from 10.6% in Q1’2019, attributable to the faster 6.1% y/y growth in average interest earning assets to Kshs 265.2 bn, from Kshs 250.0 bn in Q1’2019, that outpaced the 4.3% growth in interest income,
• Interest expense declined by 1.3% to Kshs 1.39 bn, from Kshs 1.40 bn in Q1’2019, following a 7.7% decline in interest expense on customer deposits to Kshs 1.2 bn from Kshs 1.3 bn in Q1’2019. Cost of funds, on the other hand, declined to 3.3%, from 3.6% in Q1’2019, owing to the faster 13.8% growth in average interest bearing liabilities, which outpaced the 1.9% decline in interest expense.
• Consequently, cost of funds declined to 2.4% from 3.4% in Q1’2019 owing to a 16.3% decline in trailing interest expense, despite a 17.1% rise in the average interest-bearing liabilities to Kshs 238.6 bn from Kshs 203.8 bn. Net Interest Margin (NIM) on the other hand declined to 7.2% from 7.8% in Q1’2019, owing to a 5.1% decline in Net Interest Income (NII), despite a 6.1% growth in average interest-earning assets,
• Non-Funded Income (NFI) declined by 6.5% to Kshs 2.2 bn, from Kshs 2.4 bn in Q1’2019. The decline was mainly driven by a 12.5% decline in Foreign Exchange Trading Income to Kshs 695.2 mn from Kshs 817.8 mn in Q1’2019. Fees and commissions on loans also declined by 12.5% to Kshs 73.5 mn from Kshs 76.4 mn in Q1’2019. The revenue mix remained unchanged at 68:32 funded to non-funded income owing to comparable declines both in Non-Funded Income (NFI) and Net Interest Income (NII),
• Total operating expenses grew by 5.7% to Kshs 4.0 bn, from Kshs 3.8 bn, largely driven by 116.8% rise in amortization charges to Kshs 170.0 mn in Q1’2020, from Kshs 78.4 mn in Q1’2019, coupled with a 3.1% rise in Loan Loss Provisions (LLP) to Kshs 0.43 bn in Q1’2020, from Kshs 0.42 bn in Q1’2019,
• Cost to Income Ratio (CIR) deteriorated to 58.1%, from 51.9% in Q1’2019 owing to the faster 5.7% rise in total operating expenses to Kshs 4.0 bn from Kshs 3.8 bn in Q1’2019, coupled with the 5.6% decline in total operating income to Kshs 7.0 bn, from Kshs 7.4 bn in Q1’2019. Without LLP, cost to income ratio deteriorated as well to 52.0%, from 46.3% in Q1’2019, an indication of reduced efficiency levels and,
• Profit before tax declined by 17.8% to Kshs 2.9 bn, from Kshs 3.5 bn in Q1’2019. Profit after tax also declined by 16.6% to Kshs 2.0 bn in Q1’2020, from Kshs 2.4 bn in Q1’2019 with the effective tax rate declining to 31.0% from 32.0% in Q1’2019,

Balance Sheet

• The balance sheet recorded an expansion as total assets grew by 3.4% to Kshs 311.5 bn, from Kshs 301.4 bn in Q1’2019. This growth was largely driven by a 49.5% increase in placements from banking institutions to Kshs 48.bn in Q1’2020, from Kshs 32.3 bn in Q1’2019. The loan book also recorded a 6.8% growth to Kshs 125.5 bn, from Kshs 117.6 bn in Q1’2019. Investment in government and other securities however, declined by 13.6% to Kshs 95.0 bn, from Kshs 110.0 bn in Q1’2019,
• Total liabilities rose by 3.7% to Kshs 261.6 bn, from Kshs 252.2 bn in Q1’2019, driven by a 4.6% increase in customer deposits to Kshs 243.6 bn, from Kshs 232.8 bn in Q1’2019. Deposits per branch rose by 4.6% to Kshs 6.8 bn from Kshs 6.5 bn in Q1’2019, with the number of branches remaining unchanged at 36 branches,
• Loans to deposit ratio increased to 51.5% from 50.0% in Q1’2019, owing to the 6.8% growth in net loans which outpaced the 4.6% in customer deposits during the same period,
• Gross Non-Performing Loans (NPLs) declined by 5.6% to Kshs 20.0 bn in Q1’2020, from Kshs 21.2 bn in Q1’2019, attributable to the bank’s conservative lending strategies. The NPL ratio thus improved to 14.2%, from 15.9% in Q1’2019, due to the faster growth in loans, which outpaced the growth in Gross Non-Performing Loans (NPLs),
• General Loan Loss Provisions declined by 2.9% to Kshs 7.8 bn, from Kshs 8.0 bn in Q1’2019. The NPL coverage thus increased to 78.1%, from 76.5% in Q1’2019, as the Interest in suspense declined by 4.5% to Kshs 7.8 bn, from Kshs 8.2 bn in Q1’2019, coupled with a 5.6% decline in the Gross Non-Performing Loans to Kshs 20.0 bn, from Kshs 21.2 bn in Q1’2019,
• Shareholders’ funds increased by 1.4% to Kshs 49.8 bn in Q1’2020, from Kshs 49.1 bn in Q1’2019, supported by a 6.1% increase in the proposed dividends to Kshs 5.2 bn, from Kshs 4.9 bn in Q1’2019. However, retained earnings declined by 16.6% y/y to Kshs 2.0 bn, from Kshs 2.4 bn in Q1’2019,
• Standard Chartered is currently sufficiently capitalized with a core capital to risk-weighted assets ratio of 15.0%, 4.5% points above the statutory requirement. In addition, the total capital to risk-weighted assets ratio was 18.0%, exceeding the statutory requirement by 3.5% points. Adjusting for IFRS 9, the core capital to risk-weighted assets stood at 15.0% while total capital to risk-weighted assets came in at 18.1%, and,
• The bank currently has a Return on Average Assets (ROaA) of 2.6%, and a Return on Average Equity (ROaE) of 15.8%.

Key Take-Outs:

1. Asset Quality – the bank’s asset quality improved owing to the 14.2% decline in the NPL ratio in Q1’2020 from 15.9% recorded in Q1’2019. The improvement of the NPL ratio is attributable to the 5.6% decline in Gross Non-Performing Loans to Kshs 20.0 bn from Kshs 21.2 bn recorded in Q1’2019. The improvement was mainly attributable to the faster growth in gross loans which outpaced the growth in non-performing loans,
2. Operating Efficiency - There was a decline in the bank’s operating efficiency as the cost to income ratio without LLP deteriorated to 52.0%, from 46.3% in Q1’2019. The deterioration was largely attributable to the 19.7% increase in other expenses to Kshs 1.9 bn, from Kshs 1.6 bn in Q1’2019, which were on the back on investments in their retail digital platform.

Going forward, we expect the bank’s growth to be driven by:

1. Continued focus on promoting the usage of the bank’s alternative channels is likely to continue boosting the company’s Non-Funded Income (NFI) as well as aiding in improving operational efficiency levels, which deteriorated in Q1’2020 as evidenced by the worsening of the cost to income ratio to 58.1% from 51.9% in Q1’2019. Revenue expansion coupled with cost containment will be key in boosting the bank’s bottom line.

Below is a summary of the bank’s performance: