Investors, analysts in mixed reactions over FY’16 & ‘17
Management explains situations

By Emeka Anaeto, Business Editor

INVESTORS’ response to the financial results of Guaranty Trust Bank Plc (GTB) in the past one month appeared conflicting or even confusing. At close of trading in the Nigerian Stock Exchange, NSE, weekend, the stock had just inched up to N25.00, just 1.6 per cent from the closing price pre-result announcement, despite the seeming impressive Full Year 2016 (FY’16) results.

Though the price was ex-adjustment for dividend payment the total picture still shows some lack-luster market sentiment. The stock had done fairly better at 12.3 per cent uptick post-announcement, until the adjustment for dividend. But it is yet to recover significantly, chucking up only 4.2 per cent since then. This was against the bank’s 37.4 per cent rise in gross earnings, 36.5 per cent and 33 per cent rise in pre-tax and post-tax profit respectively.

The bank had some engagements with the public over its FY’16 performance, at the backdrop of mounting concerns over the impact of macroeconomic headwinds, the fiscal and monetary policy responses on corporate performance in 2016.

However, of more concern has been the way forward for corporates, the outlook for the current year. Hence, the bank’s management had to engage the stakeholders in a Conference Call previous week and financial journalists last week, to do some explaining. Key talk points include impairment costs, earnings metrics and FY’17 Outlook.

Impairments charges to crash in 2017

GTB had reported a massive surge in credit impairment charge, at N65.3 billion, up 426.2 per cent from N12.4 billion recorded in FY’15. This, Financial Vanguard learnt, was one of the headaches of investors, apparently driving their reactions to the result.

GTB’s managing director, Mr Segun Agbaje, had told financial journalists last week that the development was much in line with the general trend in the banking industry orchestrated by the worsened macro-economic fundamentals.

However, he expects GTB’s impairment provisions in 2017 to decline significantly. Hence, he puts the ceiling on the bank’s Cost of Risk (CoR) at about 2.0 per cent maximum (N31.8 billion) with a floor of 1.0 per cent (N15.9 billion) in FY’17 compared to 4.3 per cent (N65.3 billion) in FY’16.

However, in a contrary postulation, he anticipates that non-performing loans (NPLs) will rise further due to sustained economic pressures. But Agbaje, responding to a particular question from Financial Vanguard on this seeming contradiction, explained that the bank would not need the 222 per cent coverage ratio on NPLs as it did in FY’16, adding that it would be scaled back to about 100 per cent in FY’17, thus diminishing CoR amidst a rise in NPLs.

Earlier on this same issue, Agbaje had told the audience on the Conference Call that the bank would roll-back some of the aggressive provisions made in 2016 where it provided to the tune of N50.8 billion for its trade finance loans, indicating that the performance of most of these trade loans has significantly improved largely due to the increased foreign exchange (FX) liquidity from the recent interventions by the Central Bank of Nigeria, CBN, hoping that the intervention would be sustained.

FX revaluation gains vs earnings in 2017

Again many investment analysts have noted the huge contribution of the one-off harvest from FX revaluation gains in 2016 to the bank’s bottom-line. Gains from currency devaluation (revaluation gains) in 2016 amounted to N87.3 billion accounting for 21 per cent of gross earnings. Management of the bank had explained that its earnings projections for FY’17 was not premised on expectations of another round of devaluation and subsequent revaluation windfall but rather on revenue expectations from core banking operation.

In fact, Agbaje told financial journalists that GTB, and indeed the banking industry will not likely be strong in foreign exchange denominated risk assets creation in FY’17, indicating an industry-wide scale-down in foreign currency revaluation gains in the current year.

Apparently, this explains a rather, moderate projections GTB’s management made on pre-tax profit for FY’17 at N168 billion, just an inch up by 1.8 per cent against FY’16. Off course this outlook would not impress investors and that may have partly explained the weak reaction to the good FY’16 results.

Key take-away from the Conference Call indicates that GTB expects its earnings mix in 2017 to return to pre-devaluation levels of 76 per cent interest income and 24 per cent non-interest income. Management expects income from its fixed income portfolio to grow significantly enough to cover the gap that will be created by the absence of strong revaluation gains in 2017. To hit this target, interest income will have to rise by at least 33 per cent to N349.8 billion in FY’17 from N262.5 billion in FY’16. It is not clear how this would be achieved except if fiscal and monetary authorities (CBN and the Debt Management Office, DMO) continue their current high rate policy in sovereign instruments throughout the year.

But analysts at CardinalStone Partners, a Lagos based investment house, could see the GTB’s prospect somehow. They stated: ‘‘While we think this interest income target is slightly bullish, we believe the expected lower cost of risk due to impairment write-backs may support bottom-line and make its profit target of N168 billion feasible.’’

Etisalat credit exposure

Obviously GTB expected concerns of stakeholders over its position in the credit controversy on Etisalat, one of the major telecom companies in Nigeria. The bank had demonstrated good corporate governance in the form of full disclosure being the first to come out and declare its status on the debt ring saying it is exposed to the telecom giant by USD138 million (about N42.9 billion). In his discussions with financial journalists Agbaje said interest and principal repayments were up to date as at February 2017. He further disclosed that the bank anticipates the ongoing re-negotiations to be completed this April, just before the next repayment will be due.

Moreover, the Management told the Conference Call audience that regarding exposure to the upstream sector, the bank is confident on the performance of its obligors.

Apparently they are banking on improved positions in oil production at the backdrop of a seize-fire in Niger Delta coupled with relative price stability in the international market.

There was also indication that principal repayments and interest exposures for Aiteo, Neconde and Midwestern are up to date. Noteworthy is the fact that in FY’16, upstream oil & gas credit at N302.1 billion, about 19 per cent of GTB’s total loans had zero contributions to NPLs.

Weak credit outlook

GTB has set a credit growth forecast at 10 per cent  for FY’17 but observers believe it is not keen on meeting this target as it laments the lack of quality credit opportunities. This could have been part of the reasons for the diminutive earnings projection for FY’17.

Indeed the 15.8 per cent loan growth in 2016 was mainly driven by the impact of devaluation on foreign currency credit assets, while real loans actually declined by 3.0 per cent.

As can be gleaned from the Conference Call renditions and alluded more at the financial journalists briefing the bank expects more pay down in 2017 on its foreign currency credit assets and remains skeptical on the possibility of growing its dollar loan book. Agbaje indicated that on the back of this, the bank is not keen on refinancing its maturing 2018 Eurobond and has set aside a sinking fund in the event that they decide not to refinance.

Analysts’ valuation and forecast for 2017: Based on the information from the Management of GTB some analysts have been setting out how the bank’s performance would look like as the Q1’17 result is being prepared.

Analysts at CardinalStone Partners stated: ‘‘With the yield on the bank’s fixed income portfolio north of 20%, we expect its contribution to interest income to continue to support earnings in 2017. We expect a growth of 30% and 34.7% in gross earnings (N97.5 billion) and Profit after tax (N34.7 billion) in Q1’17 respectively. We expect earnings growth to be driven largely by strong interest income growth (+20% YoY) as well as the expected moderation in impairment charges (-39% QoQ).

‘‘Management mentioned that its long dollar position is about $860 million; this means a 10 to 20% Naira devaluation will result in revaluation gains of between N27 billion and N54 billion. That said, in the event of a slight naira devaluation, GTB may significantly outperform its projection just as it did in 2016. We expect real loan growth to be relatively flat and any material deviation to be as a result of further devaluation in Naira.

Marginalexpansion

‘‘We remain bullish and confident in management abilities to meet and even outperform its current 2017 guidance. Hence, we have retained our target price of N32.68 on GTB.’’

Analysts at WSTC Limited, another Lagos based investment house stated: ‘‘We expect high yield on government securities to continue to support growth in interest income in FY 2017, as we expect a marginal expansion in loan book size. Also, barring significant volatility in the FX market, we do not expect the level of FX gains recorded in FY 2016 to recur in FY 2017. Thus, we expect a 12.6% decline in gross earnings in FY 2017.

‘‘We expect cost of funds to increase in reflection of the high interest rate environment. Also, we believe the newly introduced FGN savings bond may somewhat crowd-out the bank’s retail deposits and impact negatively on interest expense.

‘‘In view of the bank’s significant loan book exposure to the oil & gas sector and the weak outlook of oil price as well as management’s recent disclosure that the Etisalat Nigeria loan (N42 billion) is expected to be restructured sometime in Q2 2017, we still expect a high impairment charge on risk assets to be recorded in FY 2017.

‘‘Thus, we estimate that the bank’s ROAE (Return on Average Equity) will decline to 22.5% by FY 2017 (from 29.1% in FY 2016) as the cost to income ratio increases to 45.1% from 40.8% which resulted from FX income in FY 2016. We expect a FY 2017 PBT of N142 billion (more conservative than management’s guidance of N168 billion).’’