Standard Chartered Zambia’s FY 2017 headline earnings slow by 21%

STANDARD CHARTERED BANK ZAMBIA FY2017 earnings narrowed by a margin of 20.57% to ZMW286.85million ($USD29.27million) from ZMW361.09million in 2016, according to prudential statements published in the local press. Key contributors were a 74.58% widening of credit impairments, a 5.69% rise in interest expense and 27% climb in non-interest expenses which offset a contribution of an 8.85% rise in interest income backed by a 2% decline in non-interest revenue.

Financial Analysis

Credit impairments jump 74% in Q4: 2016

Credit loan loss provisions widened by 74.58% to ZMW63.695million of which 71.35% were raised in Q4:2017. Our analysts suspect, though with inconclusive evidence, that this could be linked to a Central Bank regulatory review on account of the timing of the BOZ review completion and the space in which the provisions were raised. This pattern has been observed in key banks too. However it could be as a result of prudent credit risk management decisions to clean up a book in advance for a clean 2018. These impairments were nonetheless higher than the usual quantum the bank raises. An adjusted position shows that Standard Chartered could have saved above ZMW25million in net income under normal circumstances posting an overall profit of above ZMW300million which the market analysts expected.

However we believe it could be a statement of fact that loan loss provisions have generally increased on account of a rise in non-performing loans or rates of defaulting clients. Its a huge possibility.” 

Interest expenses rise as cost of deposits rises

Stancharts (yoy) interest expenses rose by 5.69% to ZMW302million on the back of a 7% uptick in cost of deposits to ZMW292.49million. this could be positively linked to an aggressive deposit and liability strategy whose strength of correlation is weak compared to its loans and advances slowed 8.5% (yoy) however this can not fully dismissed. Standard Chartered banks balance sheet was to some degree immunized from the effects of the 2015/2016 liquidity crunch as evidenced by our analysis for the first 3 quarters of their performance where the bank took a very cautious approach to extending credit.

Non-interest expense widens cost to income ratio

Non-interest income (yoy) widened by 27% to ZMW585.38million resulting in a 1500 (15%) basis points rise in cost to income ratio to 60.5% compared to 45% in 2016. However this is one of the lowest CTI ratio’s in the industry after Barclays Banks 58%.

Investment in government treasuries scales interest income higher

Interest income was up 8.65% to ZMW1billion propelled by a lengthened duration investment in government paper that earned the bank a 50% higher revenue to ZMW400million. This is both from the trading and available for sale classifications taking advantage of the Kwacha term structure of interest rates. Interest on loans and advances eased 8.5% to ZMW596.1million from ZMW651.5million from in 2016.

Non-interest income flat

Non interest revenue lines were flat with a 3.4% rise in fees and commissions to ZMW166.2million and a 12% plummet in foreign exchange trading income to ZMW150.35million

Balance sheet grew by 8% as ROE sides 18%

Stancharts balance sheet grew 7.79% to ZMW8.73million and was able to deliver a 32.9% return on equity -inclusive of subordinated debt- to its shareholders compared to 180 basis points lower at 50% in 2016.

Market note

“Standard Chartered Banks performance earned them second place and clearly we see that a 71% spike in credit provisions likely due to regulatory supervision prescription, eroded their bottom line costing the bank over ZMW25million. However we see the same pattern with other commercial banks analyzed:- rise in government security income lines surpassing loans and advances spelling a rising appetite in treasury bills and bonds. Arguably this is crowding out the domestic credit market. The bank records a rise in overall interest income yet doesn’t do so well in non-interest line weighed by a decline in foreign exchange revenue which is disappointing for a multinational banks with a big trading desk. The banks cost to income is fairly one of the lowest but rose 15% to 60.1%. Stanchart has always been known for keeping a lower than usual equity position that is reflecting a 32.9% return on equity which has disappointingly declined 18% from what was posted in 2016. With the banks Q3:2017 our analysts expected  nothing less than ZMW340million in net income from SCB. However increased provisions and below average foreign exchange income numbers cost the bank its top position which it gave up to Barclays.”

Business Times Lead Analyst