September 08, 2020 / 10:54 AM / By FBNQuest Research / Header Image Credit: World Finance
2% increase to our price target
GT Bank's Q2 2020 PAT surprised positively relative to our forecast. However, the surprise was due to a significant result on the other comprehensive income (OCI) line. Above the tax line, pre-tax earnings missed by high-single-digits because of negative surprises in impairment for credit losses - due to the lockdown related to the pandemic - and opex. Despite the sharp rise in impairment charges and opex, management maintained its guidance of <1% and 40% for cost-of-risk and cost-to-income ratio respectively.
Following the negative surprise on both lines, we have increased our 2020E cost of risk forecast by 30bps to 0.8% and our opex forecast by c.7%. GTB's asset quality (NPL) ratio worsened slightly to 6.8% (+80bps q/q). However, following the gradual pick-up in economic activity, management does not see significant risk of further asset quality deterioration in H2. Nevertheless, we have increased our NPL forecast by 200bps to 7% (vs. 5% guidance). Despite these downward revisions, our 2020E EPS forecast is up by 6% because of the positive OCI. Nonetheless, we have cut our 2021E EPS forecast by c.2%. Regardless of the cut, our new price target of N53.3 is 2% higher because we have rolled over our valuation to 2021E.
In terms of changes to its operating model, management affirmed that plans to transition to a holding company (Holdco) structure (with four operating regions) have gained significant momentum. The change will see the bank's shareholders swapping shares in a one-for-one exchange for Holdco shares. Having shed -12.8% ytd vs -4.7% for the ASI, our new price target implies a healthy potential upside of 106% from current levels. Consequently, we reiterate out Outperform rating on the shares.
Q2 PBT down 12% y/y due to spike in impairments and opex
GTB's Q2 PBT declined by 12% y/y, due to the combination of a 261% y/y spike in loan loss provisions and a 28% y/y rise in opex. Above the provisions line, pre-provision profit was up by 7% y/y on the back of single-digit increases in both revenue lines.
The 9% y/y growth in funding income outpaced the 3.0% y/y growth delivered by the non-interest income line. Below the tax line, PAT advanced by 23% y/y to N59.3bn. However, the y/y growth was only because of a positive result of N15.7bn in OCI.
Sequentially, the growth trends mirrored those on a y/y basis. PBT fell by 12% q/q while PAT expanded by 26% q/q. Compared with our forecasts, PBT missed by -9%. However, PAT beat by around 25%.