STANBIC IBTC Bank: I am not impressed...
Dear Africa interested individuals:
I started taking a much closer look at Stanbic IBTC after the release of its FY 2014 result. Why? Beyond me being an Africa analyst, I noticed something strange on their income statement for a bank operating in Nigeria. That perennial instinctual urge to delve deeper hit me again and I could not say no. After the bank released its half-year 2015 result on July 9th, 2015, I had observed enough to speak out while keeping my explanations as simple as possible. The more we look, the more we are supposed to see; when the more we look, the less we see, then, something is out of place and needs to be put right and quickly. I will provide enough (not exhaustive) information to state my case without being verbose. Here we go.
While taking a cursory look at the fiscal year 2014 income statement of Stanbic IBTC, I noticed that the bank's interest expense was less than its staff costs. There are a bunch of relationships I have in my head about different industries in different countries and I monitor financial statements looking for anomalies whenever that company's number is called. Typically in the Nigerian banking environment, interest expense exceeds (rarely even close) staff costs. Why? Nigerian banks have been piling on debt heavily since 2008 after the stock market turned against them and stock prices headed south with a determination rarely ever seen. This is the major contributor (there are multiple other reasons) from an industry perspective as to why total interest expense typically exceeds staff costs in the Nigerian banking industry. The interest expense figure was N25.5B while staff costs were N25.8B for fiscal year 2014. These are my concerns and why I am not impressed.
I determined that the major contributor to interest expense pretty much holding constant from fiscal year 2013 - 2014 was a decline in interest expense on term deposits. In America these are typically called certificates of deposit (CD). There was a 18.8% reduction in interest expense, which equates to $18.5m. Meanwhile, term deposits actually increased over the same period by 46.3% which equates to an increase of $303m year-on-year. It is impressive and interesting that Stanbic IBTC was able to increase term deposits by 46% while on average reducing its interest paid on term deposits to 8.3% in 2014 from 15% in 2013 on average. Every bank in the world will love this scenario. Term deposits were actually responsible for 75% of the $430m (18.4%) increase in total deposits from fiscal year 2013-2014. The driver of the bank's deposits increase during fiscal year 2014 was achieved by offering significantly lower average rates on term deposits. This is an anomaly. Let us move to the next anomaly.
Current (checking) accounts typically worldwide do not earn interest and rightfully so. These are on demand funds. Stanbic IBTC's current account deposits increased by 10.6% (equates to $104.7m) from FY 2013 - 2014. This is basic and straightforward. The heart palpitations come into the picture when you realize that (based on published figures) the interest expense on current accounts increased by an astronomical 341% which equates to $11.84m. This implies that Stanbic IBTC paid an average interest rate on its current accounts of 11.3% to attract these current account deposits; not only is this high, it is more than that on term deposits of 8.3%! Do not also forget we are talking about current accounts here which are typically non-interest paying. .
I see a bank that in actuality, was actually finding it difficult (expensive) to attract deposits in FY 2014. This situation (contrived or real) could not continue much longer in my opinion. The "natural" must take precedent. True to expectation, the rope used to hold the cinder blocks broke free in the very first quarter of 2015 and interest expense/interest income spiked from an average of 35.3% in FY 2014 to 45.7% . For H1 2015, the ratio increased further to 46.9%. As at H1 2015, interest expense incurred is already 77% of total interest expense (as published) incurred during FY 2014. The one line item I had serious concerns about is the main driver of the 46% decline in profit attributable to shareholders as at H1 2015. Yes, even more than credit impairment for loan losses. Believe that! All this happened "suddenly" to a bank that achieved a 57.4% rise in profit attributable to shareholders from FY 2013 - 2014. Tsunamis do happen suddenly; the signs are not so sudden but they can be hidden. They build up into a crescendo and all hell is let loose. This is the story of Stanbic IBTC presently.
Investors and analysts typically do not bother with the cash flow statement of a bank. Point well taken and understood. The cash flow statement for a bank does provide a very good quality check for the income statement. Interest paid is cash and should tally with interest expense on the cash flow statement and the income statement. This did not happen in the case of Stanbic IBTC in FY 2014 but, did in FY 2013. Interest paid on the cash flow statement (not a line item on the income statement) was $3 million more than interest expense on the income statement. Another sign that interest expense may have been understated. The same thing happened when assessing interest income (a line item on the income statement) as interest income exceeded interest received on the cash flow statement by approximately $2 million. Combining, the two figures together leads to a boost to profit of approximately $5m (1 billion naira).
Meanwhile, the bank is in dire need of an equity capital injection as it is currently 9X leveraged which
is excessive. In furtherance of this, a rights issue at the price of N25.50 is imminent. The bank is heavily reducing the risk exposure on its
balance sheet to deal with the current trying times for the bank and the
environment it operates in. As at H1 2015, Stanbic IBTC has provided
more funds (absolute increase) to fellow banks in the form of loans than it has to
customers. Trading positions across a variety of financial instruments
have also been massively closed out leading to cash and cash equivalents
more than doubling year-on-year as at H1 2015. Let us move on to another event.
Sixteen (16) fresh legal cases were instituted against the bank during fiscal year 2014 with claims against the bank amounting to N181.4B (Equivalent to about $1 Billion using the official exchange rate applicable in December 2014.) On average, each new plaintiff is seeking $62.5 million against the bank. Wow! The bank did not make a provision on its books given the potential hefty legal exposure (pretty much every Nigerian bank does not make legal provisions on its books for impending lawsuits) deciding to wait for final resolution of the cases. I am not a fan of this, but, it is what it is. The bank was also fined by the Central Bank of Nigeria for under-reporting public sector deposits as at August 29th, 2014 which by implication, freed up some amount of deposits for use that should not have been available to the bank.
Nigeria's old national anthem started with "Nigeria we hail thee." I think we need to go back to it. On a regular basis, in the course of doing my job, I encounter unpalatable acts by Nigerian companies in their corporate financial disclosure. I keep hailing them. unfortunately, for the wrong reasons.
It is time to drop this one. I can go on and on. Peace and Love.
Always remember, if you do not stand for something, you exist for nothing.
This is the message of this blog. Tell others to tell others. A new dawn is here; let us seize the daylight with both hands.
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