What the future holds for investors

By Emeka Anaeto, Economy Editor

IN the wake of the first profit warning issued this year coming from First City Monument Bank Plc in January, Vanguard Investor’s Forum had indicated that many more quoted companies would issue profit warnings due to the macroeconomic headwind of the financial year 2015. And within six weeks about six more came in with three leading banks involved.

However, last week we warned that investors should not be fooled into believing that macroeconomic headwind tell all the story behind poor results as we expect to see some exceptions proving that even with the adverse economic environment corporate performance could be resilient. Barely 24 hours after results rolled out by Guaranty Trust Bank Plc, Zenith Bank Plc, Access Bank Plc and United Bank for Africa Plc all proved that much as the environment was difficult corporate actions should demonstrated creative navigation for good results.

Last week GTB announced its audited full year 2015 result delivering moderate growth in both top and bottom lines despite the numerous headwinds.      It is also remarkable to note that the bank reasserted its banking industry headship in the discipline of being the first to publish full year audited result every year for many years now.

Mixed full year, weak 4th quarter: The bank’s gross earnings improved 8.3% year-on-year (Y-o-Y) to N301.8 billion from N278.6 billion in 2014.

Topline growth was buoyed by 14.3% Y-o-Y rise in interest income while non-interest income dipped by 8.2%. Major drag in non-interest income was a slump in foreign exchange revaluation gains to N5.2 billion from an exceptional income of N16.2 billion in 2014. Other-income line declined massively by 52.4% eroding the modest rise of 8.1% in fee and commission income.

Quarterly analysis shows that fourth quarter (Q4), 2015 gross earnings came in weaker by 5.2% decline quarter-on-quarter (Q-o-Q) and 8.7% drop Y-o-Y. Industry analysts   attributed this to crystalisation of both the macroeconomic headwind and the accompanying monetary policy crises in response to it. Consequently, the lower yield environment due to higher liquidity level in the financial system and subsequent reduction in the Monetary Policy Rate (MPR) to 11% from 13% in November 2015 resulted in lower income to the bank.

2015 full year Profit Before Tax (PBT) grew to N120.7 billion, 3.7% or N4.3billion higher than the N116.4 billion reported in 2014. Again, Q-o-Q, the bank’s Q4 2015 PBT of N28.6 billion was down 20.1% Y-o-Y   while Profit After Tax (PAT) narrowed by 15.2% Y-o-Y to N22.7 billion, due to a lesser tax rate of 15.2% in Q4 2015 as against 22.4% a year earlier.

Expectedly, Return on Asset Employed (ROAE) and Return on Average Assets (ROAA) deteriorated to 25.6% and 4.1% in 2015 from 28.4% and 4.4% in 2014. However, the bank’s Cost to Income Ratio (CIR) improved to 42.0% in 2015 from 43.4% in 2014 to maintain its cost leadership position. Net Interest Margin (NIM) rose slightly to 8.7% in 2015 from 8.4% in 2014 on improved earnings assets.

At the backdrop of the implementation of the Treasury Single Account (TSA) in the second half of the year coupled with stiffened competition for deposits, the bank’s Cost of Funds remained relatively flat at 3.5% in 2015 relative to 3.7% in 2014. The bank’s statement of account shows a mobilization of cheaper deposits as retail savings deposits increased 19.0% Y-o-Y but with a 7.7% Y-o-Y decline in total current deposits.

Cautious risk regime, dwarfed deposit growth: Against the backdrop of hardships in the business environment GTB soft-pedaled in creation of risk assets relative to previous periods with growth in net loans & advances (N1.4 trillion in 2015 as against N1.3 trillion in 2014) slowing to 7.7% in 2015 as against 27.1% in 2014. Growth in risk assets was 28.6% in 2013.

Also with the increased credit risk fuelled by macroeconomic headwinds accentuated by lower oil prices, general elections and forex restrictions in 2015, impairment charges surged 74.8% Y-o-Y to N12.4 billion in 2015 from N7.1 billion in 2014, resulting to a Cost of Risk of 0.9%, 0.3% above previous year.

Further review shows that GTB recorded its highest loan loss provision in Q4:2015, a 51.8% Q-o-Q jump and significant 298.0% Y-o-Y surge.

Consistent positive growth

Worthy of note is the marginal drop (0.8% Y-o-Y) in total deposits to reverse its consistent positive growth in deposits in the last 4 years with the Compound Annual Growth Rate (CAGR) between 2011 and 2014 at15.8%.

A further breakdown on a Q-o-Q basis shows a major drop in Q3:2015 (5.3% Q-o-Q) relative to 2.3%, 2.2% and 0.1% Q-o-Q growth recorded in Q1, Q2 and Q4:2015 respectively. The decline in Q3:2015 is probably due to the implementation of the TSA.

Sustained dividend strength: GTB proposed a final dividend per share of N1.52, representing a dividend yield of 9.2% at a market price of N16.20 (15/03/2016). This is in addition to the N0.25 interim dividend per share paid in the first half 2015, cumulating to N1.77 per share, a 2.9% increase against N1.72 paid in 2014. GTB has over the years been a favourite for investors in the banking industry. Available records from the bank’s dividend history in the last 10 years (2004 – 2014) reveals that it had paid out a whopping N218 billion in dividends over the last 10 years. From a dividend of N2.1billion in 2004, the bank has grown its dividend payment to N50 billion as at last year.

Investors have also rewarded the bank with its valuation increasing market valuation from N60 billion to about N721 billion.

Looking ahead, analysts’ comments: Despite the moderate performance, financial analysts are uptick with GTB. Analysts at Greenwich Trust Limited had this to say: “We are of the opinion that the bank has a robust risk management framework to guard against the accumulation of toxic assets, hence it was no surprise that total loans and advances increased modestly by 7.1% in view of the weakened macro-economic environment in 2015. Nonetheless, impairment charges surged spurring a Cost of Risk above previous year”.

GT Bank currently trades at a P/E ratio of 4.8x and a P/Bv of 1.2x compared with the 0.7x average multiple for tier-1 banks.

Non-interest income

Greenwich analysts stated, “our revised 12 month price target for the lender is N22.85 implying a 39.3% premium to its share price of N16.40 as at March 16, 2016”.

They expect non-interest income to drive earnings in 2016.

Greenwich further stated “GTB appears determined to maintain its position as one of the most profitable banks in Nigeria; in Q1 2016 it has shown considerable aggression in garnering non-interest income by leading other banks in forex utilization at the Inter-bank market, by as much as 29.5%, according to CBN data”.

In its position following the announcement of the bank’s result last week, analysts at Afrinvest West Africa stated: “We maintain our conservative outlook for 2016, hence forecast 9.9% and 3.7% Y-o-Y growth in gross earnings and net income for 2016 as we anticipate loan growth to remain constrained (8.3%) as well as a higher cost of risk (1.3%).

“Consequently, we expect Earnings Per Share (EPS) to settle at N3.50 and Dividend Per Share (DPS) at N1.84 in at end 2016. The bank is currently trading at a trailing P/E and P/BV of 4.8x and 1.2x and a forward P/E and P/BV of 5.5x and 1.1x.

“Consequently, we maintain our  “Accumulate”  rating based on 12-month target price of N19.12, presenting 19.0% upside potential based on current share price of N16.20”.