Q1 19 net attributable income rose 34% yoy on aggregate (18% ahead of our forecast) and median ROE improved by 2.0ppts yoy to 24.3%, on the back of higher net interest income and trading income (CAL, EGH and GCB) and net impairment write backs (SCB). GCB outperformed significantly on earnings growth (up 71% yoy due to margin improvement and trading income gains), while SCB underwhelmed (up 8% yoy) having recorded an increase in funding costs and higher operating expenses. Net loans grew by 9% qoq on aggregate, with median NPL ratio of 10.6% for our coverage.
GCB remains our top pick among the Ghana banks due to: 1) the potential for further reduction in its cost of funds, as more expensive deposits are repriced; 2) its strong balance sheet position compared to peers; and 3) attractive valuation, at FY 2019f PB of 0.8x versus its 5-year average of 1.4x. GCB’s stock has outperformed peers (up 9% YTD vs a 3% decline for the sector), likely due to its better-than-expected Q1 19 results and FY 18 dividend announcement. Nevertheless, we see a further 136% ETR for the stock, based on our unchanged TP of GHS11.40.
Lower funding costs drove net interest income growth. Most banks recorded an improvement in net interest margins, as funding costs moderated. SCB was an exception to this, having recorded a 0.4ppts yoy increase in its cost of funds, likely attributable to the better-than-average deposit growth it achieved (up by 9% qoq vs 2% for our coverage). Consequently, while aggregate net interest income rose by 24% yoy for our coverage, the trend was more tepid for SCB at 7% yoy.
FX volatility drove non-interest revenue growth yoy. Trading income more than doubled yoy in Q1 19, as banks took advantage of volatility in the local FX market, which saw the Ghanaian cedi shed c12% in the quarter before stabilising at GHS5.15/US$. This drove the 19% yoy increase in non-interest income, as the contribution from trading income rose to 87% from 59% in Q1 18. That being said, the sustainability of these gains is largely dependent on further volatility in FX and fixed income markets.
Stable cost/income ratio was encouraging. Strong top-line growth of 22% yoy kept the cost/income ratio flattish at c51%, as operating expenses also shot up (by 19% yoy). SCB was the only bank under our Ghana coverage to post a yoy increase in the cost/income ratio (by 5ppt), due to its margin compression and a spike in operating expenses. But it remained the most efficient within our coverage with a cost/income ratio of 37%. As investments in technology across the sector gradually conclude, we expect a further decline in the cost/income ratio over the medium term, particularly for CAL and GCB.
Loan book growth was ahead of expectations. We see potential for our coverage to exceed our current loan growth expectation (c19% yoy in FY 19f), supported by the overall positive macroeconomic environment, having already reached 9% qoq in Q1 19. While peers posted net loan growth in the 8-11% range, CAL only grew volumes by 5% qoq, which could reflect its liquidity constraints (its deposits fell by 7% qoq, likely due to a reduction in expensive term deposits). Overall, deposit growth was unimpressive for the sector (up 2% qoq), although SCB outperformed with 9% qoq growth, which could explain the spike in its funding costs.
Sector NPL ratio and net impairment charge declined. Median NPL ratio declined by 0.1ppts qoq to 10.6%, although the trend was mixed across the banks. While SCB and EGH recorded improvements, the NPL ratio was higher for GCB and CAL. SCB’s NPL ratio remained the highest within our coverage at 23.7%, although we note that this was 1.5ppts lower qoq and net impairment write-backs were booked by the bank during the quarter. For the other banks, the net impairment charge was up by 16% yoy on aggregate, led by CAL and EGH, while GCB only recorded a 5% yoy decline.