GCB’s Q2 19 PAT increased by 33% yoy to GHS66mn, driven by strong revenue growth, as net interest income and trading income gains rose 28% and 56% yoy, respectively. The trend in net interest income was due to loan growth and a reduction in the cost of funds (down 140bps yoy and 20bps qoq to 4.4%). On the downside, fee income declined by 5% yoy and net impairment charges rose by 34% yoy.
Reiterate Buy with a TP of GHS11.4 (ETR 138%). GCB is our top pick among Ghana banks due to: 1) its balance sheet strength, which should continue to support growth; 2) a sustained reduction in cost of funds, as the bank offloads more expensive deposits; and 3) its attractive valuation, with 2019f PB of 1.1x, a 28% discount to its Ghana peers.
Lower cost of funds drove the improvement in net interest margin, which was up 130bps to 10.3%. The sustained decline in funding cost is likely due to the maturity and restructuring of expensive deposits from the acquired banks. Trading income growth was strong yoy, as the bank took advantage of an 8% depreciation in the GHS versus the US$ in H1 19.
Cost/income ratio improved, but stayed high as operating expense rose 16% yoy largely due to an 80% yoy increase in depreciation expense. The cost/income ratio moderated by 1ppt yoy to 63% (versus peers in the 40-45% range). Operating efficiency should improve over the medium-term, with the cost/income ratio moderating to 58% by 2021f on our estimates, as the bank’s efforts towards establishing and optimising its electronic banking systems begin to support cost containment and non-interest revenue growth.
Net loans were flat and deposits were up 4% qoq. GCB’s capacity to grow its loan book over the medium term further improved, going by the 1ppt qoq decline in net loans/deposit to 37% (vs 49% peer average) and the 130bps improvement in the capital adequacy ratio to 18.0% (vs 10% regulatory minimum). The NPL ratio was flat qoq at 8.0%, but up 1ppt yoy in line with the 34% yoy jump in net impairment charges.