We assign a LONG-TERM BUY recommendation on Stanbic Holdings. The current market price of KES 74.50 (as at 7th August 2020) presents a buying opportunity for investors with a long-term investment horizon. Stanbic is currently trading at a trailing P/B of 0.60x a discount of 25.9% over its 3-year P/B average of 0.88x. The counter also has a dividend yield of 9.5%, higher than the industry average of 5.7%. Our recommendation is informed by the following factors:
In light of the challenging economic climate brought on by the COVID-19 pandemic, we expect to see some downward pressure on NIMs influenced by the effect of a low interest rate environment (CBR is currently at a 9-year low) acting on a loan book majorly pegged on the previous interest rate regime (69.1% of the loan book matures after 12 months). However, we expect the group to take advantage of restructuring opportunities to reprice the loans on the basis of the current risk environment and we opine this should provide growth momentum for NIMs in the long-term. Additionally, we expect to see Stanbic aim to lower its cost of funds to shore up NIMs.
As a result of the pandemic, loan book growth is expected to be significantly subdued in FY2020 and this may adversely affect fees and commission income.
We expect the efficiency enhancing measures adopted by Stanbic before the COVID-19 pandemic to mitigate against the expected lower net interest income, consequently supporting the bottom-line.
Our main concern regarding Stanbic continues to be its deteriorating asset quality which has generally been weakening since FY2011. Given the economic challenges arising from current pandemic, we don’t expect to see any improvement in 2020. In the past, the poor asset quality was mainly attributable to the Corporate and Investment Banking (CIB) segment due to sector-wide asset quality issues and issues with few large corporate clients. However, in FY2020 we also expect asset quality challenges from the Personal and Business Banking (PBB) segment (which accounts for 54.0% of the loan book) due to job losses and a struggling SME sector.
In view of the foregoing, we expect to see improved performance in the long-term and recommend investment in the counter to investors with a long-term investment horizon.