Guaranty Trust Bank - Despite 52.85 YoY Decline in NIR, EPS Rose 13.73% YoY in H1-2017


Wednesday, August 16 2017, 5.40PM/ Cordros Capital

Guaranty Trust Bank Plc (GUARANTY) this afternoon released H1-2017 results, wherein gross earnings grew marginally by 2.01% y/y, supported by a surge in interest income (+51.11% y/y), which more than offset the significant decline in non-interest income (-52.85% y/y).

In addition, the lower credit loss provisioning during the period supported the bottom-line, as such, PBT grew by 10.64% y/y (91 bps above our estimate) while PAT grew at double-digit (13.11% y/y, 22.11% above our estimate), resulting in annualized EPS of N3.00 (above our estimate of N2.33). Consistent with its dividend payment, GUARANTY is proposing an interim dividend of N0.30 (a 20% growth over N0.25 in the previous year) – translating to a payout ratio of 10.55% and a dividend yield of 0.77%.

The high y/y growth in interest income (2.98% shy of our estimate) was on the back of growth in interest income on loans (rose 19.93%) and impressive gains on investment securities (+171.61% y/y). The latter was driven by increases in available for sale (152.31% y/y) and held to maturity securities (107.03% y/y), following an increase in fixed income securities volume from the expansion in the NGN yield curve.

The cumulative impact of improved yields on loans and investment securities drove 298 bps y/y expansion in asset yields to 14.52%. The significant contraction in NIR (a 3.47% variance from our estimate) broadly reflects the decline in FX revaluation gain, given the limited legroom for a sizeable exchange rate gain with the NGN fairly stable during the review period.

On the funding side, we attribute the increase in interest expense (up 18.54% y/y), despite a 25.22% y/y decline in debt securities finance, to the relatively tight liquidity in the system which drove upward repricing of deposits (interest expense on deposits rose 18.42% y/y). Also, the bank recorded a surge in interest expense on borrowed funds (81.92% y/y).

However, the expansion in asset yields more than offset the growth in funding costs (by how many bps?), and as a result, NIM expanded 201 bps y/y to 10.40%, from 8.39% in H1-16. Still on the positives, cost of risk shrank 203 bps y/y to 0.45%, from 2.48% in H1-16, consequently, credit loss provisioning declined by 80.79% y/y.

Specifically, on the performance in Q2-17, gross earnings grew marginally by 3.07% q/q (-19.10% y/y), 5.49% below our estimate, while PBT and PAT declined by 1.13% q/q (-16.46% y/y) and 0.41% q/q (-18.60% y/y), respectively in line with our estimate.

The q/q marginal growth in gross earnings broadly reflects the lackluster movement in interest income, while the bottom-line contraction was due to opex increasing by 12.70% q/q (+54.32% y/y), which more than offset the growth in NIR of 27.68% q/q (-66.63% y/y).

Over H1-17, opex (up 38.38% y/y) rose significantly, due to hikes in other opex (59.29% y/y), personnel expenses (12.77% y/y), and depreciation expense (12.41% y/y). The y/y opex pressure, by our understanding, stemmed from a one-off AMCON fee booked in line with International Financial Reporting Interpretations Committee (IFRIC) 21, and FX translation impact of subsidiaries' opex. Consequently, cost-to-income ratio (CIR) expanded by 120 bps y/y to 40.2%.

For the rest of 2017, we expect GUARANTY's sizeable portfolio of fixed income instruments and growth in FX interest income will drive growth in interest income.

That said, we believe NIR growth will be constrained by the relative stability of the NGN, which limits the possibility of any significant revaluation gains.

While we expect cost of funds to remain elevated in the course of the year, we believe the impact on NIM will be offset by higher assets yield. Based on our TP of N38.57, we have a HOLD recommendation on the stock. Our estimates are under review.

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