Earnings Report /
Nigeria

Guaranty Trust Holding: FY19 – Better-than-expected earnings as loan trend and fee incomes pick up; Buy

  • Fee income growth boosted revenues but this trend might not be sustainable going forward

  • Sustained operating efficiency with cost/income at 38%

  • Decline in asset quality might persist into 2020

Nkemdilim Nwadialor
Nkemdilim Nwadialor

Equity Research Analyst, Financials

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Tellimer Research
3 March 2020
Published byTellimer Research

Guaranty Trust Bank's FY19 profit attributable to shareholders was up 6% yoy to NGN 195bn and 7% ahead of our forecast of NGN 183bn. This performance was bolstered by strong non-interest revenue (fee and commissions were up 18% yoy) and better-than-expected impairment recoveries. Net interest income was up 4% yoy, which translated into a flat net interest margin of 6.6% (6.7% in FY 18), which we think is reflective of the lower yield environment.

We reiterate our Buy rating on GTB with an unchanged target price of NGN46.00, which now suggests an ETR of 108%. GTB trades on FY 20f PB of 0.9x, in line with frontier peers. This is due to the bank's strong digital and retail banking franchise, which enable it to: 1) sustain operating efficiency (it has one of the lowest cost/income ratios within our Nigeria coverage); 2) record strong non-interest revenues (e-business and transaction/account-related income were up 18% yoy on aggregate); and 3) maintain its relatively cheap retail deposits.

Key positives

  • NIM and cost/income ratio were broadly in line with our expectations, at 6.6% and 38%, respectively.
  • Loans grew by 9% qoq, a trend we have witnessed with the other Nigeria banks as they strive to meet the 65% LDR.
  • Cost of funds reduced by 0.2ppts qoq, despite a 6% increase in deposits, as the bank appears to be offloading its more expensive deposits.

Key negatives

  • Asset quality ratios deteriorated slightly, with NPL ratio at 6.5% (up 0.9ppts qoq) and NPL provisions coverage falling to 66% (down 24ppts qoq).

Outlook

The increased lending in the SME and real sector segments could result in NPL ratios raising in 2020 as these segments tend to be riskier.

Also, the earnings of banks have come under pressure in the wake of the new regulations and the increase in non-traditional competitors like fintechs, payment service banks etc. Management plans to continue investing in technology to offer customers a bouquet of financial services across payment, and lending. For more on the tech disruption in EM financial services see our recent report.

Table 1: FY 19 results summary
NGN bnFY 19FY 18yoy9M 19qoq

Net interest income

231

222

4%

173

34%

Non-interest income

118

115

2%

89

32%

Total income

349

338

3%

262

33%

Operating expenses

131

127

3%

100

31%

Pre-provision profit

218

211

3%

162

34%

Net impairment

(14)

(5)

147%

(8)

65%

Net attributable profit

195

184

6%

146

34%

EPS

6.96

6.54

6%

5.19

34%

Net loans

1,501

1,259

19%

1,378

9%

Total deposits

2,533

2,274

11%

2,390

6%

NII margin

6.6%

6.7%


6.8%


Cost/ income ratio

37.5%

37.6%


38.0%


ROE

31.6%

31.4%


32.4%


Cost of funds

1.8%

2.5%


2.0%


NPL ratio

6.5%

7.3%


5.6%


Provisions coverage

66%

101%


90%


Source: Company accounts, Tellimer research