Wednesday, August 16, 2017 2:09PM / ARM Research
Yesterday, Guaranty Trust Bank Plc. (GTB) released audited H1 2017 results, wherein earnings came in stronger at N83.7billion (YoY: 17% YoY) with EPS of N2.84. In addition, the bank raised interim dividend payout to 30kobo relative to trend pay-out of 25kobo which translates to a dividend yield of 1% on current pricing.
Though the higher than expected pay-out hints at a strong earnings outlook, GTB is roughly on track to meet our expectations as H1 17 EPS amounts to 50% of our FY 17 estimate of N5.97.
As in Q1 17, core earnings performance continued to reflect robust contribution of higher asset yields to interest income as GTB’s favorable balance sheet dynamics (high CASA mix and asset tilt to treasury bills) shone through the numbers.
Furthermore, the sizable loan loss provision (collective) in 2016 provided the bank legroom to scale back materially on this item in the current period. For context, despite a 27bps YoY increase in funding cost (WACF: 3.0%), asset yield growth (+272bps YoY to 12.4%) drove similar expansion in NIMs (+270bps YoY to 9.7%).
Likewise, following N65.3billion loan loss provision booked in 2016 (78% collective), the bank booked just N7.2billion in the period (-81% YoY) with annualized Cost of Risk at 1.0%.
That said, specific impairment increased 38% YoY to N14.4billion1 which we think reflects asset quality deterioration. On the other side, despite higher trading income (+141% YoY), softer FX revaluation gains (-90% YoY) as well as lower fee income (-22% YoY) drove the 52% contraction in Non-Interest Revenue (NIR).
Elsewhere, similar to Zenith, change in the treatment of AMCON levy, which entails the reporting of cost at the period incurred relative to accruals over the year, drove the increase in operating expenses (+25% YoY).Overall, lower NIR and higher operating expenses expanded cost to income ratio (CIR) by 7.9pps YoY to 38.7%.
Funding cost pressure in Q2 bolsters NIM contraction
Breakdown of Q2 17 numbers revealed funding cost pressure in the period with annualized WACF tracking higher to 3.1% (+13bps QoQ). Pressures largely stemmed from existing Eurobond2 as well as Treasury bills short positions even CASA tracked marginally lower to 81% (Q1 17: 82%).
Also, interest income declined 3% QoQ to N81.8billion due to decline in interest income on loans (-2% QoQ) and investment securities (-6% QoQ). Consequently, asset yields declined 56bps QoQ to 12.1% with NIM following suit (-42bps QoQ) to 12.6%.
Figure 1: Trend in Funding cost, Asset Yield, and NIM
Lower trading income takes shine of NIR in Q2 17
After a brisk pace over Q1 17 (+67% QoQ), NIR slowed over Q2 17 after GTB booked lower trading income (-46% QoQ) largely reflecting losses on its bond position (N157million) as well as softer income on FX trading position (-75% QoQ). In addition to this, lower FX revaluation gains of N5.6billion combined with declines in credit fees (-20% QoQ), COT (-18% QoQ) and higher transfer-related charges (N720million) to drive softer NIR over the quarter.
The foregoing alongside higher operating expenses (+15% QoQ) scaled up CIR in the review quarter to 40.3% (+3.3pps QoQ). However, reflecting lower loan loss provision (-11% QoQ) in the quarter, EPS printed at N1.43 (Q1: N1.41).
Figure 2: Attribution Analysis of Non-Interest Revenue
Overall, GTB’s ROAE rose 87bps to 31% despite the pressures in the macroeconomic landscape. This was on account of favourable balance sheet positioning to benefit from the elevated interest rate environment coupled with high provisioning base in 2016, which provided legroom for write-backs. The sturdy performance helped drive Capital Adequacy Ratio (CAR) well clear of regulatory thresholds of 16% to 22.2%.
Figure 3: NPL and Cost of Risk
Liquid balance sheet provides stage for solid FY 17
On the interest income side, the declines in loan book as well as a still elevated interest rate environment suggest that management will continue to deploy balance sheet liquidity towards its securities portfolio.
Thus, going by quarterly trend, we see room for strong growth in interest income over H2 17 and thus retain our FY 17E of N325billion (+24% YoY). On funding cost, despite pressures on deposit stemming from attractive Treasury Bills and improved dollar liquidity, we think GTB’s CASA (81%) will keep funding cost moderated over the period with FY 17E WACF at 3.0% (H1 17: 3.0%).
Consequently, we forecast net interest income to rise 27% YoY to N248.5billion with NIM of 9.4% (H1 17: 9.7%). On NIR, after the one-off transfer related charges and improved dollar liquidity, we expect fee income to reverse to quarterly trend of N14billion--N15billion. Furthermore, trading income on FX and Treasury bills is expected to remain upbeat over the period.
However, given impact of FX gains in prior year, NIR of N109billion is down 27% YoY. Elsewhere, the one-off impact of AMCON levy guides to moderated growth in operating expenses in coming quarters with FY 17E operating expenses printing at N131billon (+15% YoY).
On balance, reflecting softer NIR and increase in operating expenses, CIR of 36.6% is 3.6pps higher YoY. In terms of asset quality, while concerns on specific loans suggest higher NPL, we feel the scale of GTB’s collective provisioning over 2016 raises sizable scope for more write-backs over the rest of the year.
Given our forecast for coverage ratio and cost of risk of 100% and 1.0% respectively (2016: 229% and 4.1%), we forecast loan loss charges to decline 77% to N15.3billion in FY 17E. Cumulative impact of our estimates results in FY 17E EPS of N5.97 (+33% YoY) which largely reflects the strength in our net interest income projections and our views regarding softer impairment charges.
The stock currently trades at a current P/E and P/B of 7.9x and 2.1x vs. Bloomberg Nigerian peer average at 7.4x and 0.5x respectively-- a justified premium in the light of GTB’s best-in-class ROAE relative to the rest of the sector. We have an OVERWEIGHT rating on the stock with FVE at N42.04.
1. GTBank Reports Q2 2017 Results - Non-Interest Income Declined by 67% YoY
2. GUARANTY Declares N83.68bn PAT in Q2 2017 Results; Proposes 30k Interim Dividend,(SP:N38.92k)
3. Guaranty Trust Bank Plc Announces Board Meeting Date and Closed Period
4. GTBank Launches New Mobile App, GTWorld with Biometric Authentication
5. GUARANTY Declares N41.48bn PAT in Q1 2017 Results,(SP:N26.05k)
6. Guaranty Trust Bank Plc - Notice of Effectiveness of Issuer Substitution
7. GTB Notice of Issuer SubstitutionGuaranty Trust Bank Plc Announces Board Meeting Date and Closed Period