GCB’s Q1 19 PAT increased by 71% yoy, ahead of our forecast of 34%. The beat was largely driven by the surge in trading income, which rose 178% yoy. In addition, the bank’s bottom-line performance was the result of: 1) net interest income growth, on the back of loan growth and a stronger net interest margin (NIM) and 2) the decline in loan impairment charges. On a negative note, there was a significant increase in opex yoy as well as qoq, and the bank’s NPL ratio rose for the second consecutive quarter.
GCB is our top pick among the Ghana banks we cover due to: 1) the potential for further moderation in cost of funds as expensive deposits are repriced; 2) its relatively strong balance sheet position, given its low loan/ deposit ratio of 38% (46% for peers); and 3) attractive valuation, with its FY 20f PB of 0.6x (frontier peers: 1.3x). Although GCB continues to deliver strong performance, the bank’s stock remains one of the worst performers in our Ghana banks coverage, likely due to concerns around the integration of UT Bank and Capital Bank in August 2017 (see our recent report here).
Stronger NIM on lower cost of funds. GCB’s NIM increased by 230bps yoy to 13.1% by our estimates, because of the lower cost of funds. The latter was driven by the maturity and restructuring of expensive deposits acquired through the amalgamation of UT Bank and Capital Bank.
Balance sheet position supported strong loan book growth – in line with expectations. We expect GCB to continue to grow its loan book aggressively, given its relatively low loan/deposit ratio and high capital adequacy ratio. However, its NPL ratio rose qoq for the second consecutive quarter to 8.0% and loan impairment charges fell 5% yoy. Continued deterioration in asset quality presents a downside risk to our outlook.
Volatility in FX market drives trading income. Trading income more than doubled yoy in Q1 19 as the bank took advantage of the volatility in the local FX market, which saw the Ghanaian cedi shed as much as 12% in the quarter, before it stabilised at GHS5.15/US$. Trading income gains and the 10% yoy rise in net fee income contributed to the 50% increase in non-interest income. However, the sustainability of GCB’s non-interest income may be dependent on further volatility in the FX and fixed income markets.