1 August 2022

SCB 1H2022 Results: Rising costs hamper profit growth

In brief

SCB published its 1H2022 financial results on Friday last week, reporting a marginal decline in earnings. Pre-impairment operating income remained robust supported by strong growth in both funded and non-funded income. However, profit after tax dipped by 1.4% y/y, missing our estimates on the back of an unexpected steep increase in impairment charges coupled with a double-digit rise in operating expenses.

Performance: Higher costs stifle earnings momentum

  • Profit after tax fell by 1.4% y/y to GHS 245.0m despite strong revenue performance
  • Net interest income grew by 17.2% y/y supported by strong credit growth
  • Non-funded income increased by 28.8% y/y driven by net trading income which grew by 33.1% y/y
  • The bank reported impairment loss on financial asset of GHS 60.3m from a gain of GHS 10.1m recorded a year ago. SCB’s NPL ratio fell by 12.6pp y/y to 10.56% as the stock of loans increased
  • Operating expenses increased by 11.8% y/y to GHS 199.9m amidst rising inflation

Outlook: Rising cost of risk and cost of operations to weigh on earnings performance

  • We expect the strong growth in SCB’s funded income to persist in 2H2022 as the bank takes advantage of rising yields on government securities
  • Additionally, we expect to see some credit growth albeit at a moderate pace given the current inflationary pressures and its impact on economic growth
  • We also expect inflows from SCB’s non-funded income business to stay strong with the bank benefiting from growing forex demand and increased trading activity as liquidity returns to the fixed income market in the coming months
  • Growth in SCB’s operating expenses has trailed the annual inflation rate over the last 2 quarters. Looking ahead, we expect growth in operating expenses to remain in double-digits given that inflation is expected to remain elevated in the coming months
  • The net impairment loss on financial assets reported in 2Q2022 came in as a surprise given that the bank had consistently recorded gains over the last 5 quarters
  • With rising inflation and slowing economic growth, default risk could edge higher translating into steeper increases in cost of risk in the near term. We, however, remain optimistic that pre-impairment income will remain robust to cover higher impairment charges

 Valuation: Under Review 

  • SCB is trading at a P/B of 1.9x and we intend to re-initiate coverage in 2H2022