EUR 3.42 For Business Accounts Only

GTB 9M 17 - Softer provisioning masks slowdown in operating profits

• Guaranty Trust Bank Plc (GTB) posted a decent nine-months 2017 result supported by strong interest income and, more importantly, lower loan loss provision which managed to offset sizable decline on the non-interest revenue (NIR) leg. On balance, despite lower NIR which offset strong income from the interest leg, write backs on collective loan loss provision and loan recovery buoyed earnings growth with EPS of N27 (+7.3% YoY).
• Q3 earnings marred by funding cost pressure. Q3 2017 results pointed to waning resilience on core operations relative to the prior quarter. Pertinently, the bank grappled with cost of funding (WACF: +76bps QoQ to 3.9%) as interest expense rose 22% QoQ to N 4 billion. Consequently, NIM contracted 84bps QoQ to 11.7% as the faster rise in funding cost offset marginal gains from asset yields (+23bps QoQ to 12.4%).
• Strong numbers on the trading business…Trading income posted strong growth in the review quarter to reflect an over four-fold QoQ increase in FX trading income (N6 billion) as well as reversal to positive on the bank’s bond position (N330 million). The preceding led to a double-fold jump in trading income relative to prior quarter (N4.3 billion).
• …but lower fee income fades the shine. Regardless of the trading gains, declines in e-business income (-34% QoQ), credit fees (-50% QoQ), and higher fee expense (+93% QoQ) combine to drive softer NIR (-56%) over the quarter. However, reflecting the high base of operating expenses in the prior quarter, wherein one-off AMCON levy was incurred, operating expenses declined 40% QoQ to drive an improvement in cost to income ratio (CIR) to 30.4% (+9.9pps QoQ).
• Lower provisioning salvages earnings. In contrast to prior quarter where GTB booked specific provisioning of N12 billion, specific provisioning in Q3 was materially lower at N22 million, to offset N9 billion provisioning on the collective line (Q2 17: N5.2 billion write-back). Consequently, overall loan loss provisioning was down 66% QoQ with cost of risk at 0.3% (Q2 17: 0.9%). On balance, despite sizable decline in loan loss provisioning and operating expenses, funding cost pressure and materially lower NIR drove EPS lower to N1.42.
• Outlook – revision to estimates drive FVE higher. The funding pressures and lower provisioning ahead of expectation trigger some revisions to our estimates. First, we adjust our loan book estimate to reflect current run rate, thus we now forecast a 6% decline in loan book as elevated yields on government securities continues to drive disintermediation. Elsewhere, we raise our cost of funds by 20bps to 3.4% to reflect funding cost pressure. The foregoing drives our NIM lower (-10bps YoY) to 9.5%. Furthermore, we lower our cost of risk estimate, which we now see at 0.7% (previously 1.0%), as we believe an improving economic backdrop removes the excuse for cautious collective provisioning. Net impact of these changes result in Q4 17 PBT and PAT of  N9 billion and N41.2 billion respectively with FY 17E EPS of N5.67.
• Post adjustments, our FVE for GTB increases to N50 (vs. N42.02 previously) relative to last trading price of N41.70. GTB trades at a current P/E and P/B of 8.7x and 1.1x vs. 2017 multiples of 7.3x and 2.0x for P/E and P/B respectively. We place a NEUTRAL recommendation on the stock.

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