March 7, 2019/ ARM Research
Guaranty Trust Bank (GTB) full-year 2018 earnings expanded by 8.3% YoY with EPS printing at N6.27 but slightly lower than our estimate of N6.75 given loan-loss provision which tracked higher than we expected as the bank booked additional provision of N3.1 billion in the fourth quarter. Elsewhere, Net Interest Margin (NIMs) moderated in the period to 8.2% (-91bps YoY) on the back of lower asset yield on its trading book even as funding cost ticked higher to 3.4% (+10bps YoY) with pressure stemming from deposit. Though NPL ratio declined to 7.3% (-40bps YoY), the sticky moderation is largely hinged on the decline in its gross loan book to N1.4 trillion (-N157.2 billion).
In terms of positive, we reckon that the strong Non-Interest Revenue (NIR) and a sizable decline in impairment provided a strong pillar of support to GTB’s FY 18 earnings. On NIR, the bank saw increase across lines: net fee income (+24% YoY to N50.5 billion), trading income (+117% YoY to N24.6 billion) and other operating income (+34% YoY to N50.8 billion). On loan loss provisioning, the absence of specific impairment, compared to the prior year of N31.8 billion provided much of the softer provisioning during the year.
The bank declared a final dividend of N2.45 which in addition to interim of N0.30 brings total payout to N2.75. The final dividend translates to a dividend yield of 7.2% on current pricing.
Weak performance across income lines in Q4 18
Contrary to the support from higher NIR and lower provisioning both of which supported the full year numbers, Q4 standalone came in with a lot of concerns for us with EPS declining 6.3% QoQ. The major pressure stemmed from a moderate decline in net interest income, double-digit drag in NIR, higher loan loss provisions and a much higher effective tax rate over the quarter. On NIM, despite moderation in funding cost over the quarter (-70bps QoQ and 2.8%) with interest expense declining 23.2% QoQ, the softer asset yield (-33 bps QoQ to 10.5%) necessitated a mild decline in net interest income by 2% QoQ to N51.8 billion, even with an expansion in NIM by 66bps QoQ to 10.6%. For Interest income, the decline emanated from lower interest income on loans to customers (-4.2% QoQ to N44.4 billion) and investment securities (-20.6% QoQ to N19.4 billion).
Lower FX revaluation gains dragged NIR
Over the fourth quarter of 2017, non-interest revenue (NIR) moderated 15.6% QoQ to N28.6 billion stemming largely from a lower FX revaluation and trading gains gain of N7.8 billion (-50% QoQ) which dragged overall trading and Other income by 27.3% QoQ to N15.9 billion. However, net fee income remained resilient, expanding 6% QoQ to N12.6 billion given improvement in e-business income, higher transfer and account services, and credit related fees.
Higher provisioning compound earnings pressure
As stated above, the bank recorded a materially lower loan loss provision over 2018 following the absence of specific provisioning during the year compared to the prior year level of N31 billion, with cost of risk contracting 45bps YoY to 0.39%. However, while we had expected a possible reversal following the final resolution of 9Mobile, the bank booked additional provision of N3.1 billion (from reversal of N244 million in Q3 18) over Q4 18 with related cost of risk of 1%, a development we will be seeking clarity from management.
The cumulative impact of lower net interest income, decline in NIR and higher loan loss provision resulted in a decline in Q4 18 EPS by 6.3% QoQ to N1.49 from N1.58 in Q3 18 with ROE contracting 467bps QoQ to 31.5%. Overall, following the strong support over the full year, GTB’s ROAE rose 504bps YoY to 32.3% on account of favorable balance sheet positioning and prudent stance on asset quality. Irrespective, while GTB FY numbers came in solid, the moderation across income lines over Q4 18 spurs doubt on the sustainability of these numbers. In an era of lower interest rate environment with an expected flat movement in funding cost, and less scope for FX gains, we do not rule out further pressure in the months ahead given the low rate of risk assets creation. We will be speaking with management to get further clarify on plans to salvage earnings in the year ahead.
The stock currently trades at a current P/B of 1.9x which is at a premium to peers of 0.8x, which is fair in the light of GTB’s best-in-class ROAE relative to the rest of the sector. Our last communicated FVE on GTB is N52.60 translates to a STRONG BUY rating on the stock. We will revisit our numbers after further analysis and discussion with management.