• Strong Q2’18 performance spurs earnings beat – PAT up 14% q/q 

• Loan portfolio dips further in Q2, down 11% ytd 

• CAR remains healthy at 21.9% 

• Board declares interim dividend of N0.30 per share vs. analyst's N0.25 estimate 

Strong Q2 outpaces Q1 run rate 

09 August 2018 ( Lagos): GUARANTY released its H1’18 results, beating already impressive Q1’18 earnings and on track to set another record high profit performance. Particularly, whilst top line grew by a modest 6% y/y to N226 billion (Vetiva: N219 billion), growth in bottom line was even more impressive, up 14% to N95.6 billion – 10% ahead of analyst's N86.7 billion estimate. As against the trend observed across a few other banks, performance in the second quarter of the year came in stronger. Notably, Gross Earnings rose 8% q/q to N118 billion – supported by a 31% q/q growth in Non-Interest Income despite a flat Interest Income line. 

Analysts highlight that loan portfolio remained weak within the quarter, down 2.5% q/q and taking ytd performance to -11%. Consequently, income from loans to customers moderated amidst a relatively lower interest rate environment. However, the Interest Income line was supported by a modest improvement in income from investment securities. Analysts also highlight that in line with the mild uptick in yield observed in Q2’18 as well as the 2.5% q/q rise in customer deposits, Interest Expense was up 8% q/q – taking the expense line to N44.0 billion for the half year period, up 21% y/y and 6% above analyst's estimate. Non-Interest Income was supported by modest growth across most of the line items. 

However, FX trading gains was the notable off-shoot, up from N3.6 billion from H1’17 to N9.5 billion. More importantly, loan loss provision was contained at N2.0 billion – better than analyst's N5.1 billion estimate and prior year’s N7.2 billion. Furthermore, with Operating Expense coming in just in line with analyst's estimate at N69.6 billion, PBT rose 8% y/y to N110 billion – ahead of their N103 billion estimate. Supported by a lower than expected effective tax rate of 13% for the period vs. their estimated 16% and prior year’s 17%, PAT came in at N95.6 billion – translating to an annualized EPS of N6.50. 

Target Price revised to N51.58 (Previous: N50.88) 

Analysts have updated their model to reflect the earnings outperformance in H1’18. Notably, analysts cut their loan growth estimate for the year to a 5% y/y moderation (down 11% YTD) from their previous 5% growth forecast. Consequently, analyst's Interest Income is revised lower to N327 billion (Previous: N331 billion). 

However, their Non-Interest is raised higher to N127 billion (Previous: N107 billion) – reflecting the better than expected run rate as at H1’18. Similarly, their Interest Expense is revised higher to N88.7 billion (Previous: N82.9 billion), following the strong growth in customer deposits amidst analyst's higher interest rate expectation for H2’18. Although analysts remain cautious of the risk environment in the second half of the year and as the general elections approach, analysts cut their loan loss provision modestly to N7.9 billion (Previous: N10.3 billion) due to the contained H1’18 run rate. Analyst's FY’18 forecast translates to a cost of risk of 0.6% for the period. 

With Operating Expense coming largely in line with their estimate, the expense line is little changed at N131 billion. Hence, analysts forecast a PAT of N190 billion for FY’18. Analysts expect GUARANTY to post market leading RoAE and RoAA of 31.1% and 5.4% respectively for FY’18. The bank trades at a premium to industry peers with P/B and P/E ratios of 1.9 x and 6.7x vs. Tier I average of 0.9x and 4.7x respectively. Overall, analysts revise their target price higher to N51.58 (Previous: N50.88) and maintain their BUY rating on the stock. 

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

Source: Olalekan Olabode from Vetiva Capital Management Limited