Equity Analysis /

Guaranty Trust Holding: Q4 18 earnings broadly in line; reiterate Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tellimer Research
    15 March 2019
    Published byTellimer Research

    Q4 EPS was flat yoy at NGN1.51 and annualised ROE was 31.3% (up by 2.6ppts yoy), broadly in line with our expectations. FY 18 PBT and ROE were also in line with our forecasts, but ahead of management’s guidance (by 5.0% and c5.1ppts, respectively). Key positive surprises in Q4 were the better-than-expected trend in non-core revenues (including trading income and FX gains, which was 44% above our estimates on aggregate) and lower-than-expected operating expenses (18% below our forecast). The qoq surge in the cost of risk to 0.9% in Q4 (versus our 0.3% forecast and 0.2% in 9M 18) was unexpected, as was the pick-up in the NPL ratio to 7.3% at end-FY 18, from 5.6% in 9M 18. A final DPS of NGN2.45 was declared (c7.0% yield). 

    Maintain Buy rating with NGN50.00 TP and 50% ETR. In addition to its robust profitability and capital ratios, which are largely sustainable in our view, we like GTB’s strong and growing digital banking franchise, which should continue to support its retail penetration strategy (see: Nigeria Banks: Retail opportunities driving a focus on transactions). GTB currently trades at FY 19f PB of 1.8x, versus Nigeria and frontier peers at 1.1x and 1.4x, respectively.

    NPL ratio rose qoq, but NPL provisions coverage remained above 100%. The NPL stock rose by 28% qoq (attributed to the classification into stage 3 of some exposures in the general commerce, construction and real estate sectors) and gross loans fell by 2% qoq. However, this was slightly better than the pre-IFRS 9 NPL ratio of 7.7% at end-FY 17, as NPLs fell by 14% yoy. NPL provisions coverage also declined qoq due to write-offs made in Q4, but remained robust at 105% (including regulatory risk reserves). 

    Management’s NGN220bn FY 19 PBT guidance is 8% above our estimate as we expect non-core revenues to fall by 31% yoy. We also think the 10% yoy loan growth guidance might be optimistic given the weak macro backdrop, and forecast a slower 6% pick-up. Key loan growth target areas are the oil and gas, manufacturing and retail segments. The bank’s artificially high CRR (30.5% at end-FY 18 versus 22.5% advertised) constrains LCY lending; however, a robust FCY liquidity position (net long cUS$1.2bn at end-FY 18) should support FCY lending as opportunities emerge. The NPL ratio guidance for FY 19 is “below 5%” (we are more bearish, with a 6.2% estimate), with NPL provisions coverage forecast to remain “above 100%” (in line with our view). Management’s projection (in line with ours) is for NIMs to remain relatively stable (we think reinvestment risks on investment securities are likely to be more material in FY 20f as yields gradually decline), and for the cost/income ratio to remain low at c40% (Exotix: 38%).