Guaranty Trust Bank Plc H1 2020: Jump in Credit Losses Weakens Earnings

September 12, 2020/InvestmentOne Report

·         Net interest income of N63.33billion, down 1.48%q/q , down 10.01%y/y     

·         Non-interest income of 35.60billion, down 0.63%q/q, 3.86%y/y.

·         Profit before tax of N51.51billion, down 11.50%q/q, 28.45% y/y.

·         Profit after tax of N44.20billion, down 11.71%q/q, 29.86%y/y.

Loan Impairment Rises in Q2 2020

Segun Agbaje, the managing director/CEO of Guaranty Trust Bank Plc

Last week, Guaranty Trust bank released its audited H1/Q2 2020 result which showed a 11.50%q/q decline in PBT. This was driven by the jump in loan impairment from N1.22billion in Q1 2020 to N5.55billion in Q2 2020. This is largely in line with our expectation for banks generally as they account for the impact of the current pandemic on asset value. Similarly, Net Interest Income (NII) and Non-interest income were down marginally by 1.48%q/q and 0.63%q/q respectively in Q2 2020. We believe the decline in Net Interest Income may not be unconnected to the lack of desire to grow loan book aggressively in the face of weak macroeconomic condition. We highlight net loan only grew by 8.2%ytd at the end of Q2 2020 having grown by 8.1% at the end of Q1 2020. Net Interest Margin stood at 9.74% at the end of Q2 2020 compared to 9.89% in Q1 2020 and 9.28% in FY 2019. We further highlight that the bank’s margin was better than 9.00% for Zenith in the same period. Elsewhere, Non-interest income was down due to the 35.51%q/q decline in Net fees and commission as transaction volume and trade related income fell in the quarter due to the current pandemic. Although, Mark to market gains on trading investment and FX revaluation gain jumped by 107.96%q/q and 59.25%q/q respectively, the decline in net fees and commission was more than enough to offset the impact of these jumps on Non-interest income. 

Weak NII and Higher Impairment Drag PBT down

On a y/y basis, Net Interest Income and Non-interest income were down by 10.01% and 3.86% to N63.33billion and N34.08billion. Resultantly, the bank’s Profit Before Provisions and OPEX declined by 9.31% y/y to N97.41billion.

As a result of the 19.09%y/y (up 1.46%q/q) increase in OPEX, cost to income ratio rose to 43.15% from 40.59% at the end of Q1 2020. This is just above the bank’s 2020 guidance of 40% for cost to income ratio. Nonetheless, the bank’s Cost to income ratio is the well below peers. The bank’s cost of risk jumped to 0.41% from 0.08% in Q1 2020 and 0.34% in FY 2019. We believe this was due to the jump in credit losses. As a result of the increase in OPEX and jump in loan impairment (+261.33%y/y), PBT declined by 28.45%y/y to N51.51billion in Q2 2020. 

Weak H1 performance

For H1 performance, PBT fell by 5.25% due to the 20.03% decline in Net Interest Income, 3.33% fall in Non-interest income and 209.65% jump in Loan Impairment.

The bank’s NPL ratio rose to 6.80% from 6.53% in December 2020 as the asset quality deteriorates further due to the current pandemic. This is above the bank’s NPL guidance of less than 5% in 2020.As most banks already applying for loan restructuring with the CBN, we expect the effect of the current pandemic to be minimal on asset quality. In the same vein, with the gradual resumption of economic activities, we expect overall performance of assets to improve. While we think the bank will rather focus on its risk management strategy in 2020, we believe it is still on course to meet its loan growth target of 13% by the year end. Nonetheless, we think the bank’s current LDR ratio of 56.19% may not reach 63% target of the bank at the end of 2020.

H2 Outlook

Going forward, we expect trade related commission to improve as international trade resumes. With the recent cut in interest rate on savings account to 10% of the MPR from 30% of the MPR, we believe Net Interest Margin should improve as cost of funds (currently at 1.5% as at the end of H1 2020 from 2.33% and 2.30% at the end of H1 2019 and Q4 2019 respectively) falls further. We highlight that Savings Deposit accounts for about 31% of the bank’s total deposit as at the end of H1 2020.

Similarly, with the recent devaluation, we expect gains on FX revaluation to improve on a year on year basis. We highlight that the bank still maintains a Net Positive Foreign Currency position (N493billion) as at the end of H1 2020. Similarly, we think the bank’s CAR of 22.93% is well above regulatory requirement of 15% and places it on a strong footing to weather the looming storm.

In the same vein, with the bank’s plan on Hold Co. structure, we expect this to be positive for its shareholders in the long run as the bank diversifies its business into non-bank services. In the area of GMD succession, proper succession process is ongoing and the bank will communicate to the public once the process is concluded according to the current GMD. This may reduce the bank’s corporate governance risk in the short to medium term.

Overall, while we think the current pandemic is still a major risk to banks, we believe GTB is one of the quality names in the sector which should thrive as the bank remains resilient (efficiency and strong capital base) in the face of weak macroeconomic environment. 

 

 

GUARANTY TRUST BANK PLC Q2 2020 (YE: DEC) (N millions)

 

 

 

Q2 2020

 

Q/Q

 

Y/Y

 

H1 2020

 

Y/Y

 

 

Interest Income

 

76,671

 

-0.48%

 

-11.61%

 

153,708

 

3.16%

 

 

Interest Expense

 

-13,338

 

4.57%

 

-18.48%

 

-26,093

 

-20.03%

 

 

Net Interest Income

 

63,333

 

-1.48%

 

-10.01%

 

127,615

 

9.67%

 

 

Non-interest income

 

35,602

 

-0.63%

 

-3.86%

 

68,995

 

-3.33%

 

 

Profit before provisions

 

97,409

 

-1.81%

 

-9.31%

 

196,610

 

4.73%

 

 

Loan Impairment charges

 

-5,546

 

353.35%

 

261.33%

 

-6,769

 

209.65%

 

 

Total Opex

 

-40,354

 

1.46%

 

19.09%

 

-80,128

 

14.86%

 

 

PBT

 

51,509

 

-11.50%

 

-28.45%

 

109,713

 

-5.25%

 

 

Tax

 

-7,306

 

-10.22%

 

-18.57%

 

-15,443

 

-7.27%

 

 

Tax rate

 

14.18%

 

20bps

 

172bps

 

14.08%

 

-30.8bps

 

 

PAT

 

44,203

 

-11.71%

 

-29.86%

 

94,270

 

-4.91%

 

 

Source: Company financials, Investment One Financial Services Research  

H1 2020 BANKS COMPARISON SHEET

 

 

 

 

 

 

 

 

 

 

 

NGN billion (unless stated otherwise)

 

FBNH

 

GTB

 

ZENITH

 

ACCESS

 

UBA

 

Key Income Statement Figures

 

Gross Earnings

 

296.40

 

225.10

 

346.09

 

396.76

 

300.60

 

Net Interest Income

 

131.30

 

127.62

 

157.41

 

246.72

 

119.30

 

Non-interest Income

 

80.10

 

71.40

 

116.49

 

126.21

 

77.38

 

Total Expenses

 

139.20

 

83.30

 

135.85

 

174.29

 

132.13

 

Loan Impairment Charges

 

30.70

 

6.77

 

23.92

 

16.47

 

7.81

 

Profit Before Tax

 

41.40

 

109.71

 

114.12

 

74.31

 

57.13

 

Y/Y PBT Growth

 

14.30%

 

-5.25%

 

2.19%

 

1.84%

 

-18.71%

 

Dividend (Kobo per share)

 

nil

 

30

 

30

 

25

 

17

 

EPS (kobo per share)

 

272

 

332

 

330

 

173

 

124

 

Key Balance Sheet Figures

 

Total Assets

 

7,130

 

4,511

 

7,580

 

7,766

 

6,775

 

Total Liabilities

 

6,426

 

3,790

 

6,591

 

7,096

 

6,141

 

Total Equity

 

704

 

721

 

989

 

670

 

634

 

Key Ratios

 

Net Interest Margin

 

6.80%

 

9.74%

 

9.00%

 

4.90%

 

5.40%

 

Cost of Fund

 

2.80%

 

1.50%

 

2.20%

 

3.70%

 

N/A

 

Cost to Income

 

65.80%

 

43.16%

 

54.30%

 

65.80%

 

67.00%

 

NPL ratio

 

8.80%

 

6.80%

 

4.70%

 

4.40%

 

4.10%

 

Liquidity (bank level)

 

30.60%

 

43.15%

 

43.80%

 

44.70%

 

N/A

 

Cost of Risk

 

3.10%

 

0.41%

 

1.80%

 

N/A

 

0.70%

 

Capital adequacy ratio

 

16.50%

 

22.93%

 

20.00%

 

20.00%

 

24.90%

 

LDR

 

47.40%

 

56.19%

 

66.10%

 

59.10%

 

N/A

 

ROE

 

14.50%

 

26.78%

 

21.50%

 

19.10%

 

14.40%

 

ROA

 

1.50%

 

4.56%

 

3.00%

 

1.60%

 

1.42%

 

Source: Company financials, Investment One Financial Services Research

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