By Emeka Anaeto, Business Editor

EQUITY investors’ apathy towards Guaranty Trust Bank Plc, GTBank, persisted last week against the backdrop of the figures contained in the bank’s nine-month 2017 financial results.

Segun Agbaje

This is the first time the stock is experiencing adverse sentiment in a bulls’ season. Hitherto, the stock has been the toast of investors, emerging the best in the banking sub-sector and one of the bests in the overall Nigerian Stock Exchange All Shares Index.

As a result of the lack-lustre investor sentiment, the stock as at last weekend, saw a decline in Year-to-Date, YtD, return to 75%, from almost 79% recorded previous week, just before the results’ announcement, despite the marginal 0.72% price gain.

Financial performance: But the results didn’t quite show exciting figures. Gross earnings  decreased by 5.9% year-on-year, YoY to  N309.9 billion. Surprisingly this figure was below some analystsestimate of  N323.5 billion earlier considered negative before the actual result.

Lower impairment provisions

However, despite the decline in gross earnings, after tax earnings rose by 7.3% YoY to  N125.6 billion – within some analysts’ estimate. But the growth in bottom-line was driven by lower impairment provisions (-85.4% YoY) during the period. Interest income and interest expense increased by 36.5% YoY and 19.4% YoY to  N248.3 billion and  N58.7 billion, driven by the high interest rate regime in the Nigerian money market.

The impact was net positive for GTBank as net interest income grew markedly by 42.8% to  N189.6 billion with net interest margin (NIM) also appreciating by 228 basis points (bps) to 10.50%

The higher interest expense reported was driven by an increase in cost of deposit. Interest expense on deposit rose by 19.6% YoY from N36 billion to N44 billion, although total deposit declined by 2.5% QoQ to N1.97 trillion.

This reflects an increase in the cost of deposit during the period. As a result, net interest income rose at a rate slower than the past two quarters.

Also, Fees and Commission Income declined by 21.3%, largely due to weaker contribution from E-business income, which declined by 60% YoY to N9 billion (Q3 2016: N23 billion).

Net gains on financial instruments rose significantly, following improved gains on Nigerian Treasury Bills, bonds, and foreign exchange trading.

Despite a marginal growth in interest income during the period, annualized assets yield expanded by 234 bps YoY to 13.69% reflecting the impressive yield on interest earning assets as the interest rate environment remained elevated.

However, due to the exit of FX revaluation gains which was hugely present in the corresponding period, non-interest income slumped massively by 58.2% YoY to  N61.6 billion. On a quarterly basis, non-interest income also fell by 51.4% quarter-on-Quarter (QoQ) to  N13.4 billion, driven by the reversal of the FX valuation income of  N8.3 billion booked in previous quarter.

On the other hand, operating expenses, OPEX, rose 13.06% in 9M-17, following persisting FX translation impact on operating cost (15.60% YoY), the rise in staff cost (13.12% YoY), and operating lease expense (9.43% YoY). Consequently, cost-to-income ratio (CIR) expanded by 756 bps YoY to 36.33%.

Positively though, impairment charges plunged by 85.4% YoY and 66.3% QoQ   to  N8.4 billion and  N1.1 billion in the 9-month 2017 and Q3’17 respectively with cost of risk declining by 313bps to 0.53% . During the period, the bank wrote backN6.0billion of previously booked impairments provisions.

Financial analysts at WSTC Financial Services Limited had summarized the GTBank’s 9-month ’17 results stating that, “weak non-interest income had weighed on top line growth,” and adding that “the decline in top line was essentially driven by lower contribution from non-interest income.”

Analysts Recommendations

Looking up to full year results, analysts at Cordros Capital Limited stated: “For the rest of 2017, we expect GTBank’s sizeable portfolio of fixed income instruments and growth in FX interest income will drive growth in interest income. That said, NIR growth will remain constrained by the relative stability of the Naira, thus limiting the possibility of any significant revaluation gains (such as those seen last year) and consequent transmission (as was the case in 2016) to gross earnings. “While we expect cost of funds to remain elevated in the course of the year, the impact on NIM will be offset by higher assets yield.

“Based on our target price, TP, of N42.45, we have a  HOLDrecommendation on the stock. Our estimates are under review.

For analysts at WSTC GTBank continued to benefit from the effect of elevated interest rate environment in Q3 2017.

They stated: “We believe the impact of the elevated interest rate environment on top line growth has started to taper considering the marginal 2.2% YoY growth in interest income recorded in Q3 2017 (Q2 2017: 51.6%). That said, we expect a muted growth in interest income in Q4 2017.

“Using a combination of DCF and residual income valuation approaches, we have a fair value estimate of N40.56 for GTBank.

“At current market price of N41.70, GTBank is trading at a 2.81% premium to our fair value estimate. Hence, we maintain a  HOLD  recommendation on the stock.