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GT Bank Plc- Q1 2021 - A Slow start to the year

A Slow start to the year

• Guaranty Trust Bank recently released its unaudited Q1 2021 results which showed YoY PBT and PAT declines of 7.8% (N53.7 billion) and 9.0% (N45.5 billion) respectively, representing 20% of our full year estimate. This deviation from our forecast reflects lower than anticipated loan loss provision in the period. Notably, the moderation in interest income coupled with higher loan loss provisioning were the key drivers of the bank’s performance.
• Over Q1 2021, net interest income fell by 18.4% YoY to N52.4 billion, reflecting significant decline in interest income. Precisely, interest income declined by 21.7% YoY, dragged by the 63% decline in interest income from investment securities - a fallout of lower yields relative to same period last year. On the latter, while we have seen some recovery in fixed income yields, the rates remain relatively low, in comparison to Q1 20 rates (avg FI yields in the secondary market: 7.10% vs Q1 21: 4.78%). Consequently, net interest margin moderated by 260bps to 5.9%, mirroring the faster decline in asset yield by 340bps to 6.8%, relative to cost of fund (-9bps to 0.8%).
• Contrary to interest income, Non-interest revenue rose by 28% YoY echoing sturdy growth in E-business fee (+51.27% YoY), account maintenance charges (+26.82%), corporate finance fees (+11.08% YoY), transfer related charges (+28.83% YoY) amongst other line items. For us, improvement in e-business income largely reflects a rebalancing of base effect. In addition, increase in trading gains by 63% YoY further provided support to growth in non-interest revenue. Elsewhere, cost to income ratio rose by 160bps YoY to 41.7%, due to lower operating income (-3.9% YoY), while operating expenses flatlined.
• On asset quality, the Non-Performing Loan (NPL) ratio rose by 10bps to 6.1% (Q1 20: 6.0). Meanwhile, the bank booked higher loan loss provisioning (+51.8% YoY to N1.86 billion) over the period, with cost of risk expanding by 3bps YoY to 0.11%. Capital adequacy ratio (CAR) improved by 260bps YoY to 26.1% in Q1 2021, relative to Q1 20: 23.5%, comfortably above regulatory limit of 15%.
• Streamlining to the quarterly numbers, PBT and PAT saw a steeper fall by 24% QoQ and 23% QoQ respectively. The dour performance stemmed from declines in interest income (-17% QoQ), Non-interest income (-16% QoQ) and higher operating expenses (+14% QoQ) – a fallout of the recognition of AMCON levy and NDIC premium. These outweighed declines in interest expense (-8% QoQ) and loan loss provisioning (-80% QoQ).
• A rebound in earnings:  In our stock update published in March (See report: ), we guided that NIR would dominate earnings story over 2021. We stated that recent movements in Naira at the IEW  signals room for revaluation. In addition, we expect improvement in net fee and commission income as the base effect – a fallout of CBN revised bank charges implemented in January 2020 – filters out. In the same vein, given the recovery in yields on treasury asset, we see higher prospect for growth in interest on investment securities, cash, and financial assets.
• With the performance across income lines broadly in line with our guidance – net interest income, Non-Interest revenue, operating expenses, Profit before tax and Profit after tax accounting for 21%, 25%, 26%, 21% and 20% of our full year estimates – we have left our model unchanged and maintain our FVE of N42.21/share with a STRONG BUY rating, representing an upside of 35% based on current pricing of N31.25. GUARANTY trades at a current P/B of 1.15x, with an ROAE of 26%.