Price target down -12% due to 100bp upward revision to risk-free rate
GT Bank's Q1 '21 PBT missed our forecast by c.7% mainly because of a negative surprise in funding income. The negative surprise was underscored by lower asset yields derived from rolled-over investments, particularly those on investment securities classified as fair value through other comprehensive income (FVOCI). By way of context, the implied yield based on interest on investment securities at FVOCI was c.2% compared with 11.9% for Q1 '20.
As such, GT Bank's net interest margin (NIM) contracted to c.6.96% - the lowest in recent times - from c.9.89% in Q1 '20 (and a normalised rate of >9%). Following the negative surprise, we have lowered our funding income forecasts by c.-9% on average over the '21-22f period. These cuts underpin the c.4% average reduction to our '21-22f EPS forecasts. Despite the modest downgrades to our earnings forecasts, our new price target of NGN39.6 is.-12% lower because we have increased the risk-free-rate driving our DDM valuation by 150bps to 12.5% to reflect the uptick in government bond yields.
Although we do not have full disclosure on the maturity profile of the investment portfolio, going forward, we expect the elevated yield environment to bode well for NIMs, particularly in H2 '21f. On the back of our earnings revisions, we now expect GT Bank to deliver PBT growth of 3% y/y to NGN245bn, slightly ahead of management's NGN243bn guidance.
On a relative basis, GTB shares are trading on a '21 P/B multiple of 1.0x for 23.6% ROAE in '22f. These compare with the 0.5x multiple for 14.8% ROAE that the sector is trading on. Year-to-date, the shares have shed -3.6% vs the -2.4% return on the NSE ASI. At current levels, we see an upside potential c.27% on the shares. Consequently, we keep our Outperform rating.
Q1 PBT down -8% y/y due to marked reduction in funding income and spike provisions
GT Bank's Q1 '21 PBT fell -8% y/y to NGN53.7bn. The key drivers were a -4% y/y decline in pre-provision profits and a 52% y/y increase in loan loss provisions. The decline in pre-provision profits was mainly underpinned by an -18% y/y reduction in funding income to NGN52.4bn due to lower asset yields.
Following the rise in provisions, GTB's cost of risk increased by 20bps y/y to 0.5%. Further down the P&L, PAT from continuing operations was down -9% y/y to NGN46bn. Sequentially, PBT and PAT from continuing operations fell by between -23% and -24% q/q because of a -17% q/q decline in pre-provision profits and a 14% q/q increase in opex.