We issue a SELL recommendation on StanChart. The stock is currently trading at a trailing P/B ratio of 1.20x (based on a market price of KES 167.50 as at 19th June 2020), a 11.1% discount over its 3 –year average P/B of 1.35x. Its dividend yield of 11.9% is significantly higher the industry average dividend yield of 5.9%. The stock is however, trading ex-dividend (i.e. the company has already closed the register for dividend payments).
Our recommendation is based on the following factors:
While StanChart’s loan book recovered in FY2019, growing by 8.5% y/y to KES 128.7 bn, we don’t expect this growth momentum to be sustained in F2020 due to the anticipated challenges relating to the COVID-19 pandemic. We opine the pandemic will compel StanChart to revert to its conservative lending approach in order to reduce their exposure to bad loans. However, given the FY2019 loan book performance, we are cautiously optimistic of renewed growth in the loan book once conditions improve.
Some of the loans are still pegged to the previous interest rate regime (CBR + 4.0%). Given the low CBR of 7.0%, we expect the yield on loans to come under pressure in FY2020. Moreover, given the introduction of repayment breaks and loan extensions, we expect interest incomes on loans to take a further hit. However, we believe StanChart will use the restructuring opportunities to reprice part of its loan book to match the current risk profile of borrowers. Already, StanChart has announced that it has restructured loans worth over KES 8.0 bn.
We expect StanChart to continue to leverage its high liquidity levels (62.6% in FY2019) to keep its cost of funds low.
StanChart’s NPL ratio (as measured against net loans) reduced to 15.6% in FY2019 from 18.3% in FY2018. Despite this improvement in asset quality in FY2019, we expect asset quality to deteriorate in FY2020 – owing to the challenges occasioned by the COVID-19 pandemic. According to company management, the sectors that have been adversely affected by the pandemic include: the hospitality and tourism sector, property market, trade and SMEs.