Mar 22, 2020

Valuation Summary

• We are of the view that Standard Chartered is a “BUY” with a target price of Kshs 211.6, representing an upside of 19.8%, from the current price of Kshs 193.25 as of 20^thMarch 2020, inclusive of a dividend yield of 10.3%, 
• Standard Chartered Bank is currently trading at a P/TBV of 1.5x and a P/E of 8.1x vs an industry average of 1.2x and 6.3x, respectively. 

Key Highlights FY’2019

• Standard Chartered Bank Kenya launched its innovation hub in Nairobi dubbed “eXellerator”. The innovation hub is aimed at supporting financial technology startups to scale up and generate ideas that will solve banking problems.

Income Statement

• Core earnings per share increasing by 1.7% to Kshs 24.0 from Kshs 23.6 in FY’2018, below our expectations of a 9.8% increase to Kshs 25.9. The performance was driven by a 0.4% increase in total operating income, coupled with a 1.3% decline in total operating expenses. The variance in core earnings per share growth against our expectations was due to the 0.4% increase in total operating income, which was lower than our expectation of a 4.7% increase,
• Total operating income increased marginally by 0.4% to Kshs 28.7 bn from Kshs 28.6 bn in FY’2018. The rise was due to a 0.3% increase in Non-Funded Income (NFI) to Kshs 9.23 bn from Kshs 9.20 bn in FY’2018, coupled with a 0.4% increase in Net Interest Income (NII) to Kshs 19.5 bn, from Kshs 19.4 bn in FY’2018,
• Interest income declined by 5.9% to Kshs 25.3 bn, from Kshs 26.9 bn in FY’2018. This was driven by a 15.0% decline in interest income from government securities to Kshs 10.6 bn, from Kshs 12.5 bn in FY’2018. This was however offset by a 2.1% increase in interest income on loans and advances to Kshs 13.4 bn, from Kshs 13.1 bn in FY’2018. The yield on interest-earning assets declined by 0.9% points to 9.6%, from 10.5% in FY’2018, attributed to a decline in yields on government securities, which saw interest income declining by 5.9% despite the 1.9% growth recorded in the average interest-earning assets,
• Interest expense declined by 22.4% to Kshs 5.8 bn, from Kshs 7.5 bn in FY’2018, attributable to a 19.9% decline in interest on customer deposits to Kshs 5.2 bn from Kshs 6.4 bn in FY’2018, coupled with a 40.2% decline in other interest expenses to Kshs 0.6 bn, from Kshs 1.0 bn in FY’2018. Consequently, the cost of funds declined to 2.7% from 3.3% in FY’2018, owing to the faster 22.4% decline in interest expense that outpaced the 3.8% decline in the average interest-bearing liabilities. Net Interest Margin (NIM) declined marginally to 7.4%, from 7.5% in FY’2018, owing to the 0.4% growth in Net Interest Income (NII) which grew slower than the 1.9% growth in the average interest-earning assets,
• Non-Funded Income (NFI) rose by 0.3% to Kshs 9.23 bn, from Kshs 9.2 bn in FY’2018. The increase was mainly driven by an 11.6% rise in foreign exchange trading income to Kshs 3.2 bn, from Kshs 2.8 bn in FY’2018. However, this was offset by a 4.7% decline in total fees and commissions to Kshs 5.1 bn, from Kshs 5.4 bn in FY’2018. The revenue mix remained unchanged at 68:32 funded to non-funded income, owing to a comparable increase in NII and NFI,
• Total operating expenses declined by 1.3% to Kshs 16.5 bn, from Kshs 16.8 bn, largely driven by a 70.3% decline in loan loss provisions to Kshs 0.6 bn from Kshs 1.9 bn coupled with a 3.1% decline in staff costs to Kshs 7.1 bn, from Kshs 7.4 bn in FY’2018. The large decline in loan loss provisions was however offset by a 53.6% rise in depreciation and amortization charges to Kshs 1.3 bn from Kshs 0.8 bn in FY’2018,
• Due to the 70.3% decline in Loan Loss Provisions (LLP), Cost to Income Ratio (CIR) improved to 57.6%, from 58.6% in FY’2018. Without LLP however, the cost to income deteriorated to 55.6%, from 51.8% in FY’2018, an indication of reduced efficiency,
• Profit before tax increased by 2.8% to Kshs 12.2 bn, from Kshs 11.8 bn in FY’2018. Profit after tax grew by 1.7% to Kshs 8.2 bn in FY’2019, from Kshs 8.1 bn in FY’2018, as the effective tax rate increased to 32.3% from 31.6% in FY’2018, and,
• The bank recommends a final dividend of Kshs 15.0 per share, translating to a total Dividend per Share (DPS) of Kshs 20.0 for the year. This is a 5.3% rise from the Kshs 19.0 per share paid in FY’2018, which translates to a dividend yield of 10.3% at the current price of Kshs 193.25, and a payout ratio of 83.4%.

Balance Sheet

• The balance sheet recorded an expansion as total assets increased by 5.9% to Kshs 302.1 bn, from Kshs 285.4 bn in FY’2018. This growth was largely driven by the 8.5% increase in the loan book to Kshs 128.7 bn, from Kshs 118.7 bn in FY’2018, coupled with a 5.5% increase in placements to Kshs 39.5 bn, from Kshs 37.5 bn in FY’2018 and a 0.9% marginal increase in government securities to Kshs 99.6 bn, from Kshs 98.7 bn in FY’2018,
• Total liabilities increased by 6.5% to Kshs 254.4 bn from Kshs 238.8 bn in FY’2018. This was driven by a 5,047.3% increase in placements to Kshs 8.0 bn, from Kshs 0.2 bn in FY’2018, despite the banks’ strategy in 2019 to shift focus from corporate banking to retail banking, coupled with a 1.8% increase in customer deposits to Kshs 228.4 bn, from Kshs 224.3 bn in FY’2018. Deposits per branch increased by 1.8% to Kshs 6.3 bn, from Kshs 6.2 bn in FY’2018, with the number of branches as at the end of 2019 being 36, an increase from 34 as at end of 2018,
• The faster 8.5% growth of loans, which outpaced the 1.8% growth in deposits, led to an increase in the loan to deposit ratio to 56.3%, from 52.9% in FY’2018. The loan growth to Kshs 128.7 bn, from Kshs 118.7 bn in FY’2018 outpaced the deposit growth to Kshs 228.4 bn, from Kshs 224.3 bn in FY’2018,
• Gross Non-Performing Loans (NPLs) declined by 7.4% to Kshs 20.1 bn in FY’2019, from Kshs 21.7 bn in FY’2018. Consequently, the NPL ratio improved to 13.9% in FY’2019 from 16.3% in FY’2018, owing to the slower 7.4% decline in non-performing loans despite the 8.5% growth in gross loans (after adding back interest suspense). General Loan Loss Provisions (LLPs) declined by 70.3% to Kshs 0.6 bn, from Kshs 1.9 bn in FY’2018 consequently, the NPL coverage increased to 78.7% in FY’2019, from 67.0% in FY’2018, owing to the Kshs 1.6 bn decline in NPLs, compared to the Kshs 1.4 bn decline in LLPs,
• Shareholders’ funds increased by 2.4% to Kshs 47.8 bn in FY’2019 from Kshs 46.6 bn in FY’2018, attributable to a 7.0% rise in proposed dividends to Kshs 5.2 bn, from Kshs 4.9 bn in FY’2018,
• Standard Chartered Bank is currently sufficiently capitalized with a core capital to risk-weighted assets ratio of 14.7%, 4.2% points above the statutory requirement of 10.5%. In addition, the total capital to risk-weighted assets ratio was 17.7%, exceeding the statutory requirement of 14.5% by 3.2% points. Adjusting for IFRS 9, the core capital to risk-weighted assets stood at 14.8%, while total capital to risk-weighted assets came in at 17.8%, and,
• The bank currently has a Return on Average Assets (ROaA) of 2.8%, and a Return on Average Equity (ROaE) of 17.5%.

Key Take-Outs:

1. There was a decline in efficiency levels as the cost to income ratio without LLP worsened to 55.6% from 51.8% in FY’2018. The deterioration was largely attributable to an 18.3% rise in other operating expenses, which depressed the bottom line. The rising inefficiency was largely due to the bank’s investment in the development of robust ICT systems to enhance service delivery to clients, and,
2. The bank’s asset quality improved, with the NPL ratio declining to 13.9%, from 16.3% in FY’2018. The improving NPL ratio is attributable to a 7.4% decline in gross non-performing loans to Kshs 20.1 bn, from Kshs 21.7 bn in FY’2018 compared to the 8.5% growth in gross loans to Kshs 144.5 bn, from Kshs 133.2 bn in FY’2018.

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 FY’2019 as evidenced by the worsening of the cost to income ratio to 55.6% from 51.8% in FY’2018. 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: