May 1, 2017

GTB: Bullish investor sentiment trailing from Q1 persists

GTB: Bullish investor sentiment trailing from Q1 persists

Mrs. Osaretin Afusat Demuren Chairman, GTBank

By Emeka Anaeto,

AMIDST stellar performance in the Full Year 2016 and first Quarter 2017, investors’ sentiment has been bullish on Guaranty Trust Bank Plc’s stock, driving it to N26.63 per share by last weekend, up from N16.64 it started the year with, thus hitting a Year-to-Date (YtD) yield of over 60.04 per cent. This is against NSE negative YtD of -4.2 per cent as at last weekend.

Mrs. Osaretin Afusat Demuren Chairman, GTBank

The stock price has been in steady rise since the announcement of the Q1’17 results last week.

At gross earnings of N104.7 billion, increasing 38.8% and profit after tax at N41.5 billion, surging by 61.9% GTB outperformed most analysts’ estimates.

The top-line performance was driven principally by interest income which rose sharply by 50.6% Year-on-Year, YoY, to  N55.8 billion on the back of an impressive asset yield particularly in treasury securities, as the bank continues to benefit from the re-pricing of risk assets. There was also a 10% YoY rise in non-interest income.

The 4.37% quarter-on-quarter, QoQ, growth in interest income was in line with analysts’ estimates, but the surge in non-interest income was far ahead of consensus’ estimate, and also significantly outperformed Q4-2016, following the surge in fee and net trading incomes.

For some analysts, the record high YoY growth in interest income was not only due to stronger assets yields but also attributable to the growth in naira value of foreign exchange interest income, as well as impressive yields in investment securities which rose 155.71% YoY.

Analysts at Cordros Capital Limited, a Lagos based investment house, noted that the growth in investment securities was on the back of 156.75% QoQ and 148.22% YoY growth in ‘available for sale’ and ‘held to maturity’ securities, following an increase in fixed income securities volume from the expansion in the Naira yield curve.

Also they stated: “On the funding side, we attribute the increase in interest expense (up 19.56% YoY) despite a 36.59% YoY decline in debt securities finance (following the redemption of USD500million Eurobond in 2016 which limited FX exposure), to a relatively higher interest rate environment, amidst a 13.21% growth in deposits over Q1’16. Also, the huge growth in Other Borrowed Funds finance (88.15% YoY), coupled with FX exposure of such obligations, further pressured the improving deposit mix, with Current & Savings Accounts share of deposits (amidst intensified effort to balance mix of Foreign Currency/ Local Currency deposits) rising 896 basis points (bps) YoY to 72.60%.”

However, the significant increase in net interest income more than offset the growth in funding costs, and as a result, net interest margin expanded 248bps YoY to 10.60%, from 8.12% in Q1-2016.

Impairment chargesfor bad loans

The bank was also able to achieve a decline in cost of risk, though marginally, by 2bps YoY to 0.23% in the review period, from 0.25% in Q1-2016, driven by a greater expansion in net loans (14.59% YoY), relative to the 12.61% YoY growth in loan impairment charges.

However, impairment charges for bad loans at N3.8 billion, presented a mixed bag of fortune showing a 53.6% declined quarter-on-Quarter, QoQ, but a 12. 6% increase Year-on-Year, YoY.

This was at the backdrop of a slight decline in Net Loan by 1.7% QoQ to  N1.56 trillion, with some analysts seeing this development as management’s averseness for risk asset creation. Non-performing loans moderated slightly to 3.62% in Q1’17 from 3.66% as at FY’16.

But cost of doing business also presented a mixed bag. OPEX recorded a marginal reversal from Q4-2016, shrank slightly QoQ with a significant decline in Other OPEX (-11.98% QoQ) and a slight drop in depreciation expense (-3.38% QoQ).

However, compared with the corresponding period of last year (Q1-2016), OPEX remains elevated with   Personnel surging +20.75% YoY, operating lease (+15.11% YoY), and Other OPEX (+25.44% YoY). Only Depreciation & Amortisation moderated at -24.75% YoY.

Analysts believe the YoY OPEX pressures stemmed from higher regulatory cost and FX translation impact of subsidiaries’ OPEX.

But the bank’s high operating income growth at +47.2% YoY and +43.1% QoQ was able to overcome the impact of the adverse OPEX, thus, cost-to-income ratio (CIR) fell significantly (727 bps YoY and 1977 bps QoQ) to 38.34%.

On the outlook for the rest of the year analysts see GTB’s sizeable portfolio of fixed income instruments, the growth in FX interest income, and the on-course management guidance of 10% actual loan growth (ex- currency translation impact) as lead elements for gross earnings growth.