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STANBIC BANK Q1, 2022: A BIG RECOVERY

With the release of the first quarter result for 2022 ,   the red ink blotting the progress of  Stanbic-IBTC  in the financial year 2021 has been dabbed off leaving only promises of a perpetual stay within the black lines of profitability ; this latest  result marks a recovery phase of the group after that financial turmoil ; it is equally leaving  the glimpses of what is possible in the remaining part of the year.

 STANBIC IBTC HOLDINGS PLC Interim consolidated and separate statement of profit or loss for the three months period ended 31 March 2022 shows a profit after tax of N15.07b from N11.26b in the corresponding period of 2021 , indicating 33.9% increase .This translates to a 35% increase in its   basic earnings per ordinary share of 111k from  82k in the corresponding period of 2021 . This EPS gain has been considered exceptional in the banking industry .Investors’ reaction to the banks’ Q1 22 results has been largely neutral with the average gain in EPS of +11.6% y/y of some banks considered by some analysts to arrive at this average . This Stanbic’s EPS gain is surely impressive in the context of inflation at 15.9%. .STANBIC’s EPS has demonstrated the above exceptional rebound .

Moreover , despite the current investor apathy around banking stocks, Stanbic-IBTC fundamentals have remained compelling in this first quarter .More so ,in an environment where negative inflation-adjusted yields remain the theme, Stanbic bank dividends continue to offer more attractive yields than Treasury bills just as its valuations remain compelling and hold value for long-term investors

This is a reverse of the 2021 scenario. In the first quarter of 2021 relative to the period in 2020 ,  Stanbic  Bank  faced some  tensed challenges  that  brought it many paces backward . This lasted throughout that year and eventually negatively affected its final and full year results. At the end of 2021 , its Key performance were almost virtually down . Return on Assets ,down to 2.1 %  from 3.8% ;Return  on  equity to 14.7%  from 24.3%  ;Net interest margins   to  2.9 %  from 3.5%  while its  cost to income ratio inched up  to 62.3.%  from 47.0 % .Also , its Gross earnings ratio  was down by  12%, Earnings per share by 42%3 and Profit after tax down by 32%

 But the management of this bank  now appears to be on top of the situation . As indicated above, a  detailed analysis of its first quarter results shows bank is reversing the negative trend with its first quarter 2022 results .  Its gross earnings are the first testimonial that delivered that  level profitability , regarded as a big recovery by some analysts, comparative to the corresponding period in 2021 ‘ it recorded a 47.7% jump in its gross earnings to N67.23b from N45.52b driven by a supersonic jump in interest income and trading income . Interest income inched up by 57 % to N33.00b from N21.01b while its trading income hitN10.50b from N3.22 b , a 226% increase . Despite at a marginal increase rate of 4.3% , Fee and commission revenue also contributed to the positive outlook of the gross earnings moving up to  N23.13b from N22.17b  

The above impressive gross earnings and profitability are confirmed by some key profitability ratios that moved equally sharply  northward. Its return on its assets improved gallantly from 1.64% to approximately 2%. Its return on assets was impressive despite a giant leap in its total assets by 13% between the first quarter of 2021 financial year and the first quarter in 2022 to N 3.099 trillion from N2.743trillion ; its return on equity inched up impressively to 38% from 30%

Generally , Q1 22 was a decent quarter in terms of earnings for some banks. Most of the banks that published results including Stanbic reported EPS growth that was driven by increased funded income, following expansion in banks’ loan books and some upward repricing of loans. Higher yields in Q1 22 (versus Q1 21) saw banks earn higher interest on their investment securities portfolios y/y. Overall, banks’ Yields on Assets (YoA) were much improved compared with the prior year. Elsewhere, banks’ Cost of Funds faced some upward pressure: however, they were able to keep rises below the rise in asset yields. As a result, Net Interest Margins (NIM) were resilient. Non-interest revenues (NIR) also continued on their upward trajectory. Stanbic Bank was not excluded from the above scenario .

However, while  its interest income  contribution to profitability was impressive in 2022 , when compared to that recorded in 2021 first quarter in some respect there is a twist regarding that contribution. ..If anything, an increase in earning assets figure should result in more robust earnings and profitability except may be spreads or the difference between interests earned and interests paid are not quite attractive.  Due to high cost of funds , it became harder to generate better value or profit from its earning assets for many banks including Stanbic . Though , with a deft application of experience employed by the management it generated a 57% increase in interest income compared to net loan assets increased of only 5.4% in the first three months of 2022 .To hit this huge percentage increase ,Stanbic  Bank raked in about  N33.00b as its interest income in 2022 against N21.01b  in 2021 .

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But it did this at a greater cost relative to the 2021 figure . While  the bank got N71 for every N100 of interest earned in 2022 , it wringed out  N75 for every N100 in 2021, though  in 2021 the bank  interest income was lower compared to that of 2022 .However , both records are adjudged to be impressive despite their differential contribution to profitability  

Beyond this twist in the contribution of interest earned to the bottom line ,some spoilers still raised their ugly heads in the first quarter ,2022 . Its Net impairment  on financial assets which  was N586m against  N148m recovery in 2021 was the greatest spoiler to the recovery efforts .  This definitely affected the bank’s bottom line

What would have saved this bank from the negative impact of the loan impairment were its incomes from net  fee and commission but the lethargic increment of 4.3%  increasing  to N21.71b from N20.82b  made it contribution  too cold for comfort though it gave its non interest income a positive outlook .In spite of this , the  bank is expected to boost its commissions from non interest dependent transactions for better performance and recovery during ongoing financial year

Another potential spoiler against the bank’s recovery in 2022 was its high cost to income ratio ,making the bank equally less competitive  . Though it improved from 69% in 2021 to 63.8 % in 2022. This inability to control operating is unlike Stanbic Bank regarded as one of the most efficient banks in Nigeria three years ago .

 Fortunately , both trading  and other revenues  boosted the chances of its recovery with the former inching up powerfully by- 226% to N10.50b from N3.22b while the latter hitting  N425b from a loss position of 952m .

However , while the  impressive showing in the trading portfolio and other revenue led to 61.4%  increase in Profit before tax  of  N19.60b from N12.14b ,  its massive income tax  dwarfed the net income  though it retains its positive outlook compared to its 2021 which was negative . . Income tax skyrocketed to N4.53b from N886m  , an increase of 411.4% . However , these potential spoilers were unable to give  its net income  a negative outlook as recorded in the corresponding period of 2021 ; its profit after tax inched up to    N15.07b  from N11.26b ,an increase of 33.9% 

  The massive income tax  wrecked havoc on the bottom line in terms of profit margins . While there was an upward swing  in its  pre -tax margins inching   up to 29% from  26.6%   its net profit margins were down marginally  to  22.4%  from  24.7 % .But  these challenges were not enough to bring down its basic /diluted  earnings per ordinary share  as increased by 35% to 111k from 82k

 No doubt , Stanbic Bank has what it takes to recover fully and surpass its past records considering its pedigree as a very efficient bank. Its impressive performance in the trading income segment , arising   from the capital gain earned from buying and selling financial instruments ,confirmed this as much . Trading  income is the most volatile form of bank revenue. Even a record of consistent profit in trading over a long period is no guarantee of future losses arising out of market corrections or simply making the wrong bet on financial markets.   . 

 Moreover ,the management is not relenting in beefing up its balance  .During the period under review , its total assets  increased by 13% to N3.099trillion from N2.74b  This is a  sinecure for a stronger balance sheet and potential for better earnings this year  . A puffy assets level could indicate improved strengths in mopping up transactions, including a better position in maturity transformation- the stuff banks are best suited for. It can also mean that the bank has applied some elastic to its wings in the form of more customer touch points, branches and Point of Sale devices. For  Stanbic , it was all of these and more.

 No doubt ,  Stanbic  bank needs to improve on its lending skills . This may not be farfetched .A banker is best rated by his or her ability to lend safely and profitably ,not only by the bank’s volume of assets or equity though they could enhance performance. When a bank gets these two angles right , it becomes highly competitive ;this will be  reflected vividly in a strong Net Interest Income , NII, and ultimately its net interest margin . The net interest margins of stanbic  bank has been nose diving for a long time .   

This is systemic or an industry -wide phenomenon   Net interest margins metric  is  driven by net yield available on these assets after taking into account the cost of funding  ; in the last few years ,banking industry in Nigeria has continued to battle low interest rate environment .

For this  bank to fully recover its needs to sharpen its skills  in the area of core banking or business of maturity transformation to enhance a better spread  between the rates at which the funds are borrowed and the rate at which they are invested or loaned out . First ,by increasing its current account and saving  deposit accounts which have reduced drastically in the recent times through intensive marketing machine .    

 Also , a  major challenge before any banker that determines the performance  of his or her bank in the core banking segment  is getting sound and appropriate  fund transfer pricing, a method used by bankers to evaluate the profitability of deposits and loans .However, this is a task to some bankers.  In the case of deposits, when bankers evaluate the profitability of deposits, they know the cost, the interest to be paid on those deposits and the associated operating expenses, but determining the return is more problematic because deposits are used to finance various types of assets; for loans, the problem is symmetrical. Bankers know the return on loans, that is, the interest income (net of the expenses incurred by bad debts), but not its funding cost. The reason in this case is that banks use several sources of funds to finance assets such as demand deposits, savings .In the nutshell ,for Stanbic to regain its impressive and track record , it has to sharpen its skills to lend profitably and safely .

   Finally , the lethargic performance in the fee and commission income  segment is expected to be reinvigorated . Fee revenue is generated from the sale and provision of financial services to customers. The level of fees and commissions will be communicated in advance to customers. Fee income, separate from trading income and known as non-interest income, is desirable for banks because it represents a stable source of revenue that is not exposed to market risk. It is also attractive because it provides an opportunity for the bank to cross-sell new products and services to existing customers, and the provision of these services does not expose the bank to additional credit or market risk. Fee income represents diversification in a bank’s revenue base.

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