GUARANTY declares 25Kobo Dividend per Share in Q2 '14 result, (SP:N29.50k)


Thursday, August 21, 2014 1:07 PM / ARM Research

Guaranty Trust Bank Plc. (6 months ended June 2014)  
Guaranty Trust Bank Plc (GTB) reported audited results for the 6 months to June 2014 wherein revenues rose 7% YoY to N132billion. PBT came in 7% weaker YoY at N53.4billion while PAT was 10% lower YoY at N44billion YoY. 

• GTB announced an interim dividend of 25kobo which translates to a dividend yield of 0.8% using its last trading price. 



Revenue comes under some pressure
• After a 12% jump in Q1 14, gross earnings retraced by 3% in Q2 14 to N65.1billion, 12% short of our estimates. Interest income rose 5% QoQ to N51.2billion while non-interest revenues (NIR) contracted 25% QoQ to N13.9billion. The boost to interest income largely reflected a further 20bps rise in asset yield to 10.6% while earning asset volumes stayed flat QoQ. Indeed though asset yield was 10bps ahead of our estimates, weaker than expected asset volumes was primarily responsible for interest income falling 9% short of forecasts as GTB failed to break out of the asset growth stagnation after the late 2013 surge. On the other hand, NIR was 21% short of our estimates which anticipated the quarterly rate in Q1 could be sustained. The significant QoQ step-down in Q2 is reminiscent of the 2013 pattern and suggests NIR pressure likely came from a combination of fee and forex income cutbacks.

But overall cost containment tempers impact on profits
• Growth in GTB’s funding base was also subdued (+3% QoQ) with the higher volumes directly reflected in a 4% QoQ expansion in interest expense to N14.4billion, 2% short of our estimates. Accordingly, annualized WACF remained unchanged at 3%. The mild increase in funding costs is in line with our expectations for tighter competition for funds which materialized in the period.

• Still in a positive vein, after reaching a quarterly high in Q1 14, opex moderated 10% QoQ to N21.5billion, 17% behind our estimates. Whilst the breakdown is unavailable, we suspect the shortfall on both fronts reflects more moderate accruals for regulatory costs. In line with the sharper opex contraction relative to revenues, cost-to-income ratio (CIR) narrowed 120bps to 43.7%.


• The disappointment on the cost front came from provisioning which surged 146% QoQ to N3.8billion (+287% YoY). This marks the highest quarterly charge in nearly three years and we think it is likely related to impairments on the flurry of loans created late in 2013. Nonetheless, the extent of charges is of concern only relative to GTB’s traditionally high standards with cost of risk of 0.5% still moderate relative to peers.

• Whilst the impairment jump played a role, revenue weakness already set the tone for 9% QoQ contraction in PAT to N25.4billion and 10% QoQ contraction in PAT to N20.9billion. Both were 20% short of our estimates. Corresponding PBT and PAT margins at 40% and 33% respectively are each 200bps lower QoQ and 600bps lower YoY. 

Significant profit cutbacks to drive rating downgrade
Gross earnings weakness for GTB largely reflects the challenges we believe faces the overall industry which has informed our conservative assumptions on revenue growth. GTB’s NIR in particular is likely to maintain current muted levels going forward in line with 2013 pattern. Nonetheless, interest income improvement is a positive, underpinned as it were by new loan creation in the tough operating environment.

Furthermore, we expect operating efficiency to remain strong but will keep an eye on provisions which could stay elevated. Our revisions, particularly to revenues, are set to impact profits expectation as Q2 outcome reverses nearly all the Q1 improvement. Whilst current PE and P/B of 8.8x and 2.3x remain at justifiable premia to peers’ 6x and 1.1x, in our view, preliminary adjustments to our models suggests upside potential at current price could fall below 20%. Hence, we envisage our rating on GTB could change from BUY to OVERWEIGHT.

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