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Guaranty Trust Bank Plc Q2 17 - Earnings advance on lean provisioning

• Yesterday, Guaranty Trust Bank Plc. (GTB) released audited H1 2017 results, wherein earnings came in stronger at N83.7billion (YoY: 17% YoY) with EPS of N2.84. In addition, the bank raised interim dividend pay-out to 30kobo relative to trend pay-out of 25kobo which translates to a dividend yield of 1% on current pricing. Though the higher than expected pay-out hints at a strong earnings outlook, GTB is roughly on track to meet our expectations as H1 17 EPS amounts to 50% of our FY 17 estimate of N5.97.
• As in Q1 17, core earnings performance continued to reflect robust contribution of higher asset yields to interest income as GTB’s favorable balance sheet dynamics (high CASA mix and asset tilt to treasury bills) shone through the numbers. Furthermore, the sizable loan loss provision (collective) in 2016 provided the bank legroom to scale back materially on this item in the current period. On the other side, despite higher trading income, softer FX revaluation gains as well as lower fee income drove the 52% contraction in Non-Interest Revenue (NIR). Elsewhere, similar to Zenith, change in the treatment of AMCON levy, which entails the reporting of cost at the period incurred relative to accruals over the year, drove the increase in operating expenses (+25% YoY). Overall, lower NIR and higher operating expenses expanded cost to income ratio (CIR) by 7.9pps YoY to 38.7%.
• Funding cost pressure in Q2 bolsters NIM contraction: Breakdown of Q2 17 numbers revealed funding cost pressure in the period with annualized WACF tracking higher to 3.1% (+13bps QoQ). Pressures largely stemmed from existing Eurobond as well as Treasury bills short positions even CASA tracked marginally lower to 81% (Q1 17: 82%). Also, interest income declined 3% QoQ to N81.8billion due to decline in interest income on loans (-2% QoQ) and investment securities (-6% QoQ). Consequently, asset yields declined 56bps QoQ to 12.1% with NIM following suit (-42bps QoQ) to 12.6%.
• Lower trading income takes shine of NIR in Q2 17: After a brisk pace over Q1 17 (+67% QoQ), NIR slowed over Q2 17 after GTB booked lower trading income (-46% QoQ) largely reflecting losses on its bond position (N157million) as well as softer income on FX trading position (-75% QoQ). In addition to this, lower FX revaluation gains of N5.6billion combined with declines in credit fees, COT and higher transfer-related charges (N720million) to drive softer NIR over the quarter. The foregoing alongside higher operating expenses (+15% QoQ) scaled up CIR in the review quarter to 40.3% (+3.3pps QoQ). However, reflecting lower loan loss provision (-11% QoQ) in the quarter, EPS printed at N1.43 (Q1: N1.41).
• Overall, GTB’s ROAE rose 87bps to 31% despite the pressures in the macroeconomic landscape. This was on account of favourable balance sheet positioning to benefit from the elevated interest rate environment coupled with high provisioning base in 2016, which provided legroom for write-backs. The sturdy performance helped drive Capital Adequacy Ratio (CAR) well clear of regulatory thresholds of 16% to 22.2%.
• Liquid balance sheet provides stage for solid FY 17: Cumulative impact of our estimates results in FY 17E EPS of N5.97 (+33% YoY) which largely reflects the strength in our net interest income projections and our views regarding softer impairment charges. The stock currently trades at a current P/E and P/B of 7.9x and 2.1x vs. Bloomberg Nigerian peer average at 7.4x and 0.5x respectively-- a justified premium in the light of GTB’s best-in-class ROAE relative to the rest of the sector. We have an OVERWEIGHT rating on the stock with FVE at N42.04. 

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