Thursday, April 19, 2018 /12:38PM /ARM Research Fee Income growth appears sustainable
Guaranty Trust Bank (GTB) first quarter result was quite impressive as strong growth in fee and trading income as well as lower provisioning saved the day for PBT which expanded 4.8% QoQ to N52.6 billion. Irrespective, higher payment to the taxman (+50% QoQ) dragged EPS marginally lower to N1.52 (Q4 17: N1.53).
In terms of the earnings, Net interest income increase of 4.5% QoQ largely reflected the decline in interest expense (-4% QoQ). Irrespective, net interest margin (NIM) moderated to 10.09% (Q4 17: 10.8%) on the back of a 60bps QoQ moderation in asset yields. Further, despite a sharp jump in fee and trading income, lower FX revaluation gain drove a 10% QoQ decline in non-interest revenue (NIR) which moderated the 57% QoQ decline in loan loss provisioning. For context, stripping out FX revaluation gain, which was 61% lower QoQ to N5.4 billion (Q4 17: N13.8 billion), NIR should have expanded 32% QoQ to N22.1 billion to drive a 30% expansion in PBT to N47.2 billion. Much of the jump in NIR emanated from a 370% QoQ increase in fee income as well as a 268% QoQ expansion in trading income.
Net loans decline negates FY 2018 guidance
Over the first quarter, GTB’s loan book sustained its decline by 7% QoQ despite a 7% expansion in deposit. Consequently, loan-to-deposit ratio moderated to 51.5% (Q4 2017: 64.34%). The decline in loan book comes as a surprise considering Management’s guidance to grow its loan books by 10% over 2018.
Thus, achieving its guidance implies ~18% growth in loans over Q2–Q4 2018 to achieve this guidance. That said, higher impairment (N171 billion from N64 billion in Q4 17), in line with IFRS 9, largely drove the decline in net loans as gross loan expanded 1% QoQ. Irrespective, GTB’s result indicates a deliberate strategy to keep balance sheet liquid, as Investment Securities expanded 22% QoQ to N818 billion – liquidity ratio at 56% (Q4 2017: 48%).
As earlier stated, fee income expanded 370% QoQ to N15.2 billion in Q1 2018, given sizable jump in credit related fees (+179% QoQ), corporate finance fee (348% QoQ) and gains on the E-business (N2.1 billion) and commission on FX deals (N1.8 billion) relative to a loss position of N1.7 billion and N2.0 billion respectively in Q4 2017. In our view, given that most of the growth in fee income are from sustainable line items, we are likely to see the level of fee income over the rest of the year.
FX trading income back to resilience
GTB’s trading income jump of 268% QoQ largely reflected N3.5 billion booked in FX trading income (Q4 2017: trading loss of N75 million). According to management, the FX trading income is pure trading income from activities in the dealing room, which we find quite impressive relative to peers wherein FX trading income reflects gains on derivative position and thus questions the sustainability of this line item. Elsewhere, FX forward position expanded (in notional value) to N62 billion (Q4 2017: N31 billion) even as the bank reported N135 million loss on its forward transaction. Management noted that the forward position are pure trade transactions entered into between the customers of the Bank and CBN and awaiting settlement in CBN forward window. Also, the increase in the notional amount can be attributed to growth in transaction volumes, availability of FX in the forward market and ability of Customers to wait for 90days or more to effect settlement of their obligation. Net long FCY position currently stands at $1.1 billion.
65% of exposure to 9mobile has been provided for
A key driver for Q1 earnings was the sharp decline (-57% QoQ) in loan loss provision with Cost of Risk contracting to 0.11% (Q4 2017: 1.1%). The decline reflecting zero provisioning on the specific and collective leg over the quarter. However, in line with IFRS 9, GTB booked N1.5 billion on 12-month expected credit losses (ECL) and N581 million life-time ECL impairment. According to Management, post Q1 2018 result, 65% of exposure to 9mobile has been provided for. Thus, NPL ratio printed at 6.2% (Q4 2017: 7.7%).
Overall, GTB’s ROE expanded by 105bps QoQ to 30.8% on account of favorable balance sheet positioning and prudent stance on asset quality.
The stock currently trades at a current P/B of 2.44x which is at a premium to peers of 0.7x, which is fair in the light of GTB’s best-in-class ROAE relative to the rest of the sector. Our last communicated FVE on GTB is N55.20 which translates to an OVERWEIGHT rating on the stock. We will revisit our numbers after further analysis and discussion with management.
Fee Income growth appears sustainable