Culled—-Proshare

August 2, 2016/Vetiva Research

• Bottom line down, bank declares N41 billion loss
• Cost pressure persists, Interest Expense up 73% y/y
• Efficiency deteriorates amidst higher OPEX (FY’15 CIR: 113%)
• CAR weakens amidst 8% rise in loan book (FY’15 CAR: 12%)

Interest, impairment, and staff cost impact bottom line
After a prolonged delay, SKYEBANK released a disappointing FY’15 result, reporting a loss after tax of N40.7 billion – a significant deviation from 9M’15 profit of N12.0 billion and our N13.2 billion estimate.

Although Gross Earnings came in just in line with our estimate and up 12% y/y (supported by the impressive 19% y/y rise in Interest Income), Non-Interest Income was down 21% y/y, having recorded a net expense of N2.7 billion in Q4’15 standalone following an impairment charge of N7.1 billion recorded on other financial assets. Furthermore, we recall that in a bid to shove up its customer deposit (post TSA), SKYEBANK had issued time deposit notes at relatively high rates.

Consequently, the bank reported significant rise in Interest Expense, up 73% y/y and 27% ahead of our estimate. Also, following a modest N1.1 billion loan loss provision recorded in Q3’15, the bank reported a significant N21.1 billion provision in Q4’15 vs. our N6.2 billion Q4 estimate.

Consequently, Operating Income declined 36% y/y to N50.4 billion – 45% below our estimate. The bottom line pressure was however intensified further as Operating Expense rose 50% y/y to N88.0 billion (Vetiva estimate of N74.7 billion).

The OPEX pressure was largely driven by the doubling of staff cost. We believe this must have been largely due to the acquisition of Mainstreet Bank.

TP revised to N1.36 (Previous: N2.49)
We have updated our model to reflect the dismal performance. Although we note CBN’s recent intervention in management and the subsequent N100 billion liquidity injection, we remain wary of the bank’s near term outlook.

Amidst the sticky top line growth, we expect SKYEBANK’s relatively weak liquidity position (FY’15 CAR: 12%), below regulatory capital adequacy (c.25% as at FY’15), pressured OPEX, and asset quality concerns to define FY’16 performance.

Consequently, we revise our FY’16 bottom line forecast to N7.8 billion loss (Previous: N8.6 billion profit). SKYEBANK trades at a 2016E P/E and P/B of -1.2x and 0.1x compared to our coverage averages of 3.1x and 0.5x respectively.