Thursday 24th August 2017 9:22AM/ Cordros Capital
In its recently released H1-17 results, GUARANTY's non-interest revenue (NIR) declined significantly by 52.85% y/y, reflecting a lower than expected FX revaluation gains which by our understanding, is as a result of the lower exchange rate adopted by the bank (N317/USD1 vs. the average NIFEX rate of N328/USD1). Despite assuming a higher exchange rate might be adopted in the course of the year, we believe NIR will still lag FY-16 by 30.17% y/y to N111.68 billion.
Thus, we expect NIR contribution to gross earnings to drop to 34.33% in 2017F, compared to FY-2016's 35.86%. Following the expansion in asset yields in H1-17 (rose 299 bps y/y to 14.51%), we have reviewed our 2017F asset yield estimate 65 bps higher to 13.60%, resulting in interest income growth of 31.3% y/y to N344.77 billion. Accordingly, we forecast gross earnings to grow 10.70% (previously 5.51%) y/y in 2017F to N458.99 billion.
We maintain our cost of fund estimate of 3.15% for 2017F (34 bps y/y uptick from 2.81% in FY-16) which we forecast will drive 19.77% y/y growth in interest expenses to N80.36 billion (a reflection of the relatively tight domestic system liquidity – which has driven upward repricing of deposits -- as well as the impact of the US Feds rate hike, with 6 months LIBOR of 1.46% as at July, from 1.29% in December 2016). However, we expect the impact of the higher funding cost will be marginal on net interest margin, wherein we forecast a 177 bps y/y expansion to 10.78%.
We expect a cut back in loan loss provisioning in 2017F on possible reclassification of some NPLs 9expected to decline to 3.55%) owing to the (1) successful restructuring of exposures across sectors, specifically FCY loan exposures, (2) relative stability in oil production and prices, with attendant impact on oil & gas upstream obligors cash flow, and (3) improved FX availability to manufacturers and oil & gas downstream obligors. Given the ongoing restructuring of Etisalat Nigeria (now 9Mobile) for a possible sale in the interim, we believe a haircut is eminent on the exposure. And while the bank's management guided to a less aggressive impairment provisioning this year, given the c.N60 billion collective impairment booked in the previous year, we have adopted a more conservative approach for provisioning during the year. Hence, we forecast cost of risk of 2.15% (213 bps lower y/y, but above management guidance of 1-2%), translating to a 46.39% y/y decline in impairment charge to N34.99 billion in 2017F.
Noting the surge in opex over H1-17, which by our understanding was driven by a one-off charge (rather than amortized over the year) for regulatory levies (specifically AMCON levy) in line with International Financial Reporting Interpretations Committee 21, we look for a lower opex charge for the rest of the year. Accordingly, forecast 16.43% y/y growth in opex to N132.31 billion, translating to a cost to income ratio of 38.35% and operational leverage of 4.0x, compared to 40.76% and 4.0x, in FY-16, respectively. Overall, we forecast PBT and PAT growth of 23.63% and 28.25% to N210.27 and N169.65 billion respectively, equating to a 271 bps and 28.25% expansion in RoAE (20117F: 31.52%) and EPS (2017F: N5.76), respectively.
Following the upward adjustment to EPS, we raised our target price by 10.05% to N42.45 (previous: N38.57) and rolled forward our valuation to 2018. GUARANTY is currently trading at 2017F P/BVPS of 2.1x (above peer average of 0.9x and a 5-year average of 1.9x) and 2017 FP/E of 7.1x (above peer average of 5.6x and a 5-year average of 6.8x). HOLD
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