March 25, 2019/ARM Research
At its full year 2018 analysts conference call and our follow up engagement, management guided to a 10% growth in loans over 2019, with focus on oil & gas sector, retail clients and manufacturing sector. Further, they guided that submissions have been made to unlock funds from the differentiated cash reserve ratio introduced by the MPC and awaiting approvals by the apex bank. Leveraging its retail presence, management expects 12% growth in deposit, 40% cost to income ratio, 9% net interest margin (NIM), and cost of risk and NPL ratio (coverage ratio above 100%) of below 1% and 5% respectively. Overall, management guided to PBT growth of 2% to N220 billion (8% YoY in FY 18).
We maintain our STRONG BUY rating on GUARANTY with a revised FVE of N49.66/share (from N52.60/share) due to i) expectation of slower growth in net loan book forecast by 5.2% YoY (previous: 6.4% YoY); ii) upward revision of cost of risk to 0.5% (previously: 0.2%) implying loan loss provision of N6.6 billion (+35% YoY) with management putting on hold the reversal of excess provisions on 9Mobile due to concerns on the ability of management to improve performance going forward; iii) increase in forecast cost to income ratio to 36.2% (previous: 35.7%); and iv) 7bps downward revision of forecast NIM following expectation of sticky funding costs and slower expansion in assets yield. We align our deposit growth with management guidance, as we expect the Quick Credit Scheme to drive increased transfer of salary accounts to GUARANTY. Accordingly, we forecast EPS growth of 4% YoY to N6.53 (previously: N7.15). GUARANTY trades at a FY 19E P/B of 2.1x, at a premium to ZENITH of 1.4x, which is justified given its strong and sustainable ROE. At current price, our expected dividend of N2.82 over FY 19E translates to a dividend yield of 8% (Zenith: 13.6%).
NIR to dominate earnings story
The surge across Non-Interest Revenue (NIR) lines over 2018 came as a surprise relative to our expectation earlier in the year given the high base in 2017 that was propelled by currency movement. However, the convergence of NIFEX-NAFEX rates and increased FX related transactions provided much of the support for further growth in FX revaluation and trading gains in 2019. While the convergence over 2018 signals limited room for material revaluation gain in 2019, we expect the higher volatility of FX transactions by customers, gains on financial instruments (with management further reiterating appetite for government securities and our projected expansion in trading books by 50% YoY) and resilience in net fee income to still provide strong support for NIR over 2019.
Investment securities to remain central to interest income growth
As mentioned earlier, management guided to a 10% YoY (-13% YoY in FY 18) increase in loan over 2019 with much of the growth expected to emanate from exposures to retail clients, oil & gas and manufacturing. While we reckon with management drive within the retail segment (with Salary Advance and Quick Credit), we believe the sticky NPL (-32bps YoY to 7%) and related impact of 12-month ECL1 on new credits create a cap on loan growth over the year. With that in mind, we model effective FY 19 loan growth of 6% (net loan growth of 5.2% to N1.3 trillion) which tracks below management guidance of 10%. Accordingly, we see further decline in interest on loans by 2% YoY to N188 billion.
With our outlook of softer interest rate environment over 2019, we see lower prospect for significant growth in interest on investment securities, cash and financial assets. However, with management guiding to a more aggressive play in sovereign instruments over 2019, we expect expansion in treasury instruments and cash equivalents by 6.3% YoY to N1.5 trillion. Accordingly, we estimate 9% YoY expansion in interest income on investment securities to N126 billion. As a result, we see moderate expansion in interest income by 2.3% YoY to N314 billion (N318 billion, unadjusted for subsidy interest reversal), with related yield on assets increasing 24bps YoY.
Sticky funding cost to neuter NIM expansion
On the funding side, we aligned our forecast deposit growth with management guidance of 12% as we expect management retail loan drive to support transfer of salary accounts to GT Bank. As a result, we expect CASA2 share of deposits to expand 61bps YoY to 84.5%. However, we expect the impact of the CASA expansion to be limited by increased borrowing over 2019, following a 42% YoY decline in FY 18. As such, we expect a marginal moderation in funding costs of 2bps YoY, which necessitated a moderate contraction in NIM by 7bps YoY.
Aggressive provisioning suggests writebacks in near term
During our engagement with management, they guided to the fact that writeback (estimated at ~N19 billion) and reclassification of 9Mobile was delayed due to the bank’s conservative view on the ability of the new management to pay down the restructured facility. As such, we note that the risks associated with 9Mobile persists albeit moderated. Also, compounding asset quality pressure over Q4 18 was the classification of ~N13 billion exposure in the general commerce (most of which we believe is FCY related) as NPL. On the positive, management adopted aggressive provisioning in 2018, taking advantage of the one-time opportunity provided by the introduction of IFRS 9, which suggest lower likelihood of provisioning in the year ahead and higher likelihood of writebacks. Overall, we estimate moderate expansion in CoR to 0.5% (management guidance of below 1%), which implies loan-loss provision of N6.6 billion (+35% YoY) over 2019.
Slower but persistent earnings growth in near term
Net impact of our overall adjustment translates to PBT of N223.3 billion and EPS of N6.53 (+4% YoY) over 2019. We forecast EPS of N6.69 (+3% YoY) and N7.12 (+6.4% YoY) over FY 20F and FY 21F respectively. GUARANTY trades at a FY 19E P/B of 2.1x, at a premium to ZENITH of 1.4x, which is justified given GUANRANTY’s strong and sustainable ROE. At current price, our expected dividend of N2.82 over FY 19E translates to a dividend yield of 8% (Zenith: 13.6%).