Wednesday, October 17, 2018 10:16:16 PM- Nigerian Stock Exchange.

  Guaranty Trust Bank Plc :Raising the bar on ROE


09 August 2018 ( Lagos ): Guaranty Trust Bank (GTB) seems to always find a way to outperform and top its deed. In its half-year 2018 audited numbers, profit before tax (PBT) printed at N109 billion (+8.4% YoY) with after-tax profit of N95.6 billion (+14.2% YoY) – EPS of N3.38 (H1 17: N2.96). Estimated ROE and ROAE touched a new feat of 38.5% and 37.0% respectively (H1 17: 31.1% and 30.9%). The bank proposed interim dividend of N0.30, same as prior year.

How the numbers stack up. The jump in earnings came despite contraction in net interest margin (NIMs) by 157bps to 8.1% - a reflection of lower asset yields (-126bps YoY to 11.2%) and higher funding cost (+28bps to 3.3%). In terms of earnings drivers, the bank reported a double-fold YoY increase in trading income of N12.6 billion which was driven by growth in trading gains on FX (N9.5 billion) and Treasury Bills (N2.9 billion). Fee income also expanded, though modestly (+15% YoY to N27.4 billion), on the back of jumps in corporate finance fees (107% YoY), commission on FX transactions (80% YoY) and transfer related charges (40% YoY). 

Consequently, the bank reported non- interest revenue of N63.3 billion (+34% YoY). Cost to Income ratio was recorded at 38.4%, down from 38.7% as at H117. To note, FX trading income are pure trade transaction and not derivative position–reflects customer trade transactions awaiting settlement in CBN forward window with the customer's naira account blocked for equivalent amount.

Lower impairment charge, how low? 

Annualized Cost of risk came in at an 18-quarter low of 0.3% as the bank booked N2.03 billion in impairment charge (-72% YoY) mirroring collective impairment write-back of N6.4 billion, lower specific impairment of N11 billion (-21% YoY) and loan recovery of N2.9 billion. So far, the bank has written back ~ N25.2 billion in collective provision, which is about 50% of the total collective impairment booked in 2016. In terms of asset quality, NPL ratio of 5.8% tracked higher relative to H1 17 but a sizable improvement from full-year 2017 (H1 17: 3.7%, FY 17: 7.7%). Coverage ratio (incl. regulatory reserve stood at 168% (FY 17: 120%).

Liquid Balance sheet stores up. 

Balance sheet stood more liquid in the period with investment securities book expanding 14% YTD to N766 billion while loan book is down 11% YTD to N1.3 trillion - liquidity ratio of 50.3% (47.6%). Deposit grew by 10% YTD to N2.3 trillion with CASA1 as a share of total deposit printing at 83% (FY 17: 82%). Analysts estimate net long FCY position of $1.3 billion (Q1 18: $1.1 billion).

Analyst's Take. GTB result was positive and in sync with analyst's views with H1 18 EPS accounting for ~50% of their FY 18E EPS. However, analysts are likely to revise their 3% YoY loan growth expectation for FY 18E as well as CoR of 0.5% given the decline in loan books and lower provisioning. Particularly on impairment charge, with sizable scope for write backs, given leg-room of ~ N25 billion, earnings are expected to surprise for the rest of the year. 

That said, analysts will be seeking clarity from management on funding cost given the pressure seen so far, which is likely to inform a revision in FY 18E funding cost. Aside this, analysts think the bank is on track to match or outperform their FY 18E EPS of N6.12. With expansion in ROE, market is likely to stretch the valuation gap between GTB and Zenith.

The stock is trading at a P/B of 2.5x, a premium to peer average of 0.9x, a seemingly justified premium in the light of GTB’s best-in-class ROAE relative to the rest of the sector. Analyst's last communicated FVE of N49.02/share is at a 26% upside from last closing price of N39/share and informs their STRONG BUY rating on the stock.

Reporting for EasyKobo on Thursday ,09 August 2018 in Lagos, Nigeria

Source:   Kayode Omosebi from ARM Securities Limited


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