Q2 PAT rose by 14% yoy on aggregate for our coverage, on the back of strong revenue growth (up by 27% yoy), as net interest margins (NIMs) improved across the board and trading income rose for most of the entities we cover. This offset operating cost pressure and higher net impairment charges. GCB had the most impressive after-tax profit growth (up by 33% yoy), but SCB underwhelmed (down by 21% yoy), having recorded a sharp increase in net impairment charges. Net loan growth was weak (1-2% range qoq), but the median NPL ratio improved by 0.4ppts qoq to 10.1%.
GCB is our top Ghana bank stock, with a TP of GHS11.4 and a 138% ETR, due to: 1) a sustained reduction in its cost of funds, as the bank reprices/offloads expensive deposits; 2) its strong balance sheet position (relative to peers), which we expect to continue to support growth; and 3) its attractive valuation, with a 2019f PB of 1.1x – a 28% discount to its Ghana peers. Our Ghana banks coverage trades at FY 19 PB of 1.5x versus 0.9x for our overall coverage.
NIMs improved as funding costs fell. Our coverage NIM rose by 0.8ppts yoy to 9.4%, due to higher yields on short-term T-bills, which drove a 33% increase in net interest income for our coverage. EGH led the sector, with a 2.0ppt yoy expansion in its NIM and 44% yoy growth in its net interest income. Asset yields weakened yoy for most banks due to lower lending rates, following the central bank’s 100bps rate cut in January. However, this was outweighed by a decline in cost of funds, which came on the back of cheaper deposit mobilisation.
Non-interest income increased by 11% yoy, driven by trading income, which accounted for 47% of non-interest revenue versus 38% in Q2 18, as banks took advantage of GHS’s 8% depreciation against USD in H1 19. Net fee income rose by 9-12% yoy for EGH and SCB, but fell by 5-13% for CAL and GCB, likely due to the impact of loan write-offs on credit-based fees and lower commissions charged due to increased competition. Although trading income was a key driver of non-interest revenue in H1, its sustainability is dependent on volatility in FX and fixed income markets.
Cost/income ratios were lower, despite a 19% yoy increase in operating expenses. This was due to higher revenue growth, which drove the 3.1ppt yoy reduction in the cost/income ratio to 49%. We attribute the cost increases at CAL and GCB to investment in digital banking systems, which should support medium-term efficiency gains and non-interest revenue growth. EGH recorded higher administrative costs, while SCB’s depreciation expense increased, likely due to the adoption of IFRS 16.
Net loan growth was weak qoq, but sector deposits were up 8%. Net loan growth compared with Q1 was in the 1-2% range for most banks, which may reflect write-offs (as NPLs also declined for most) and capital constraints (for EGH). Deposit growth was more encouraging, with CAL significantly outperforming, with 30% qoq growth in deposits, resulting from a branch expansion and increased retail client engagement.
There might be near-term risk to deposit growth for some banks, as the Bank of Ghana recently restricted the payment of facilitation fees to agents, particularly for raising public sector deposits. Based on discussions with management at CAL, this is unlikely to disrupt the agency banking infrastructure being developed by banks to drive their retail franchise.
NPL ratio further moderated for most, with the exception of GCB, for which it was flat qoq. SCB’s NPL ratio remained the highest within our coverage at 22.3%, although it declined by 1.3ppts qoq. The decline in the NPL ratio could be related to the trend in net impairment charges, which rose by 106% qoq for our coverage (up by 118% yoy), as banks continued to address asset quality issues. The rise in impairments was sharpest at CAL (up by 302% yoy) and SCB (up by 282% yoy).
Strong capital ratios for most should support future loan growth. Strong CAR at CAL, GCB and SCB (18-27% range versus 13% regulatory minimum) should support the medium-term capacity of the banks to increase loans. EGH is the exception, as its low CAR (13.2%) might constrain its loan growth. We expect the bank to continue to focus on investment securities while it tries to strengthen its capital base via earnings retention.