Thursday, October 19, 2017 9:28 AM /Vetiva Research
· Earnings beat despite weaker top line
· Contained loan loss provision – 44% better than our estimate
· Cautious credit stance, loan portfolio declines 10%
Earnings beat despite y/y moderation in top line
GUARANTY continues to post strong earnings performance with PAT coming in ahead of our estimates – beating already impressive earnings run rate. Whilst Gross Earnings moderated 6% y/y to ₦310 billion (3% below our estimate), PAT rose 5% y/y to ₦126 billion – ahead of our ₦115 billion estimate and translating to a notable 41% PAT margin.
Amidst a return to normalcy of NonInterest Income (down 59% y/y) - following prior year’s high base due to huge FX revaluation gains and E-business income, Interest Income rose 36% y/y – tracking our ₦249 billion estimate. In line with the general industry trend, high interest rate environment and strong yield on assets continue to support top line performance despite weak credit growth (ytd: -10%).
Furthermore, GUARANTY continued to benefit from the improving macroeconomic environment, reporting a modest ₦8.4 billion loan loss provision vs. our ₦14.8 billion estimate and significantly lower than the ₦57.1 billion reported in 9M’16. Also, with Operating Expense contained to a modest 9% y/y growth (11% lower than our estimate), PAT came in at a record high of ₦126 billion.
On a q/q basis, we highlight the upward trending Interest Expense (up 22% q/q) and the significantly weak Non-Interest Income (Q3’17: ₦12.6 billion – lowest normalized quarterly performance in over the last 4 years) as a cause of concern. However, strong Interest Income, moderating OPEX, and improving asset quality should bode well on earnings going forward.
Target Price revised to N43.63 (Previous: N39.15)
We have revised our model to reflect the deviations across most line items. Notably, we cut our loan loss provision to ₦12.5 billion (Previous: ₦19.8 billion) to reflect the lower than expected NPL formation rate. Also, despite revising our loan growth forecast to -5% (Previous: 0%), we maintain our Interest Income estimate at ₦332 billion, supported by the elevated interest rate.
However, we cut our Non-Interest Income to ₦83.0 billion (Previous: ₦92.8 billion). That said, we remain cautious and forecast a higher run rate for Operating Expense in Q4’17, translating to ₦122 billion (Previous: ₦128 billion) for FY’17.
Overall, we raise our FY’17 PAT forecast to ₦162 billion (Previous: ₦153 billion) – translating to an EPS of ₦5.49 (Previous ₦5.20). GUARANTY trades at a premium to industry peers with P/B and P/E ratios of 2.1x and 7.6x vs. Tier I average of 1.0x and 5.2x respectively.
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