Equity Analysis /
Nigeria

Guaranty Trust Holding: Better-than-expected results; reiterate Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Contributors
    Rahul Shah
    Ayodeji Dawodu
    Tellimer Research
    18 April 2019
    Published by

    Q1 19 EPS rose 10% yoy to NGN1.74 and ROA improved by 0.5ppts to 5.7%, tracking ahead of our full-year forecasts of NGN6.12 and 5.0%. A positive surprise was the NGN6.1bn in ‘recoveries and others’ reported under ‘other income’, which more than accounted for the yoy increase in the bottom line. There was also a surprising 92% increase in credit-related fees yoy, despite weaker loan volumes. The unexpected 76% spike in AMCON charges came as a major negative surprise, which kept the cost/income ratio flat yoy at 38%. As expected, net interest income was slightly lower and trading income and FX gains declined sharply. The CAR remained strong at 22.3% (fully adjusting for IFRS 9), above the 16% regulatory threshold.

    Reiterate Buy with NGN50.00 TP and 53% ETR. GTB’s profitability and capital ratios remained robust in Q1 and are largely sustainable, in our view. We also like its strong and growing digital banking franchise, which outperformed our expectations on e-banking revenue generation by 16% in Q1 and should continue to support the bank’s retail penetration strategy. GTB currently trades at FY 19f PB of 1.4x versus frontier peers at 1.3x.

    Non-interest revenues were up 6% yoy, adjusting for ‘recoveries and others’. We will be seeking clarification from management on the recoveries, as they were significantly higher than the NGN0.5bn amount offset against net impairment charges in Q1 18. Meanwhile, the increase in other non-interest revenues was driven by the jump in credit-related fees and a 51% yoy increase in e-banking revenues, which more than offset a 35% decline in trading income and FX gains. Net interest income fell 2% yoy due to weaker asset yields and loan volumes. Cost of funds fell yoy, according to our estimates, but not enough to stop the 0.2ppts decline in net interest margins. 

    AMCON charges drove a 9% increase in total operating expenses. The charges unexpectedly spiked by 76% yoy to account for 22% of total operating expenses (from 13% in Q1 18), possibly because a significant portion of the charge for the full year was recognised in Q1 19. Other operating expenses were down 2% yoy on aggregate, due to reductions in personnel expenses, occupancy and admin costs. 

    Loan growth is yet to materialise, but NPLs fell moderately. Gross loan volumes were flat compared with end-FY 18, lagging management’s 10% growth guidance and our 6% forecast for FY 19f. NPLs fell by 4% from the end-FY 18 level, resulting in a 0.3ppts drop in the NPL ratio to 7.0%, and NPL provisions coverage fell 15ppts qoq to 90%, likely due to significant write-offs. Deposits rose by 6% from end-FY 18 and the CASA ratio was steady at c83%.