Thursday, August 18, 2016 9:21am /Vetiva Research
• Earnings beat estimates – PAT up 45% y/y
• Top line supported by Non-Interest Income
• Devaluation supports loan, deposit and asset growth
• Board of Directors declares N0.25 interim dividend
• TP revised upwards to N32.45 (Previous: N30.67)
Earnings beat consensus despite spike in loan loss
GUARANTY released H1’16 results posting strong top line growth with Gross Earnings up 37% y/y and 39% higher than our estimate. Although Interest Income was down 4% y/y, the impressive top line growth was driven by the exceptional Non-Interest Income of N98.8 billion vs.
H1’15: N38.0 billion and Vetiva estimate of N36.5 billion. The strong growth in Non-Interest Income was largely driven by the rise in FX revaluation gains – a performance similar to the trend observed across other banks in Q2 following the currency devaluation.
In spite of a strong 23% deposit growth, Interest Expense remained contained at N30.7 billion - 9% lower y/y and 3% better than our estimate. Surprisingly, GUARANTY recorded a historic loan loss provision of N37.5 billion (Q2:16 standalone of N34.2 billion), significantly ahead of our N7.4 billion forecast and prior year’s N6.0 billion with an estimated NPL ratio of 4.0%.
Whilst the higher provisioning is in line with the industry trend, we are taken aback given the magnitude of the change. Despite this spike, Operating Income rose 25% y/y to N140.4 billion - ahead of our N111.6 billion estimate.
Furthermore, with Operating Expense down 9% q/q, the expense line came in flat y/y - 4% better than our H1’16 estimate – translating to a CIR of 35%. Consequently, PBT rose 45% y/y to N91.4 billion (50% better than our N60.8 billion estimate). Overall, with an effective tax rate of 15% vs. our 18% estimate, PAT rose 45% y/y – 55% ahead of Vetiva and Consensus estimates.
TP revised to N32.45 (Previous: N30.67)
We have updated our model and revised our forecast accordingly to reflect the earnings miss, particularly in the loan loss provision and FX revaluation. Whilst we are impressed by the quantum of the revaluation gains recorded, we highlight the risk as this points to the bank’s currency risk exposure.
With the currency still under immense pressure in Q3’16, we expect Non-Interest Income to remain strong, albeit at a slower pace. However, we revise our loan loss provision estimate to N57.4 billion (Previous: N14.8 billion), pressured by the tough operating environment – translating to a CoR of 3.8%.
Though we expect the cost containment so far to persist through FY’16, we raise our Interest Expense to account for the rise in deposit.
Overall, we raise our TP to N32.45 (Previous: N30.67) translating to 2016 P/BV and P/E ratio of 5.8x and 1.5x respectively with a comfortable CAR of 18.25% (regulatory minimum: 15%).