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GTB Plc 9M 2020 - Lower earnings, fairly valued

• GT Bank Plc released its unaudited 9M 2020 result yesterday, recording PBT and PAT decline of 1.9% and 3.2% YoY respectively, representing 69% of our full year estimate. The deviation reflects higher than anticipated loan loss provision. Notably, interest expense fell by 25% YoY mirroring lower interest rate environment.  However, decline in non-interest revenue (-3% YoY), higher loan loss provisioning and operating expenses were the major drivers for the performance. 
• Over 9M 2020, Net interest income expanded by 10% YoY to N189.7 billion, reflecting a faster decline in interest expense over the period. Notably, interest expense moderated by 25% YoY stemming from the low yield environment as well as the improved CASA mix (9M 2020: 88%, vs FY 19: 85%). Meanwhile, interest income expanded by a meagre 2% YoY as the bank was only able to grow its loan book by 4.6% YTD (however, loan book grew by 13.9% YoY). As a result, net interest margin moderated by 20bps to 7.8% mirroring the faster decline in asset yield by 100bps to 9.4%.
• Elsewhere, Non-interest revenue declined by 3% YoY echoing moderations in credit related fees (-43% YoY), corporate finance fees (-62% YoY), account services (-50% YoY) and E-business fee (-26% YoY) – a fallout of revised fees and charges. Meanwhile, the lower credit related fee and corporate finance fees basically reflected the effect of the covid-19 on new loan originations and corporate finance deals. Operating expenses rose 13% YoY reflecting higher regulatory cost as AMCON levy and NDIC rose by 11% and 31% YoY respectively, while operating income increased by 5% YoY. This translated to a cost to income ratio of 39.2% (+270bps).
• On asset quality, NPL ratio moderated slightly by 3bps YTD to 6.5% (H1 20: 6.8%). Meanwhile, the bank booked higher loan loss provisioning (+165% YoY to N7 billion) over the period, with cost of risk expanding by 26bps YTD to 0.6%. Capital adequacy ratio (CAR) improved by 139bps to 23.9% in 9M 2020, relative to FY 19: 22.51%, comfortably above regulatory limit of 15%.
• Streamlining to the quarterly numbers, PBT and PAT expanded by 12% and 9% QoQ respectively. Despite moderations in interest income (-3% QoQ), Non-interest revenue (-18% QoQ) and the expansion in loan loss provisioning (+46% QoQ), faster decline in interest expense (-7% QoQ) and the significant contraction in operating expenses (-33% QoQ) provided support to the earnings. Clearly, the moderation in operating expenses largely mirrors the recognition of AMCON levy and NDIC premium in H1 2020 in line with the requirements of IFRIC 21 levies.
• As earlier stated, 9M loan loss provision is running ahead of our FY 20 estimate, therefore we have made an upward adjustment to N9.2 billion (previously: N6.8 billion) with NPL ratio at 6.5% (previously 5%) and cost of risk to 0.6% (previously 0.4%). In addition, we now expect non-interest revenue to decline by 1.5% YoY (we previously expected an increase of 5%) in other to better reflect the impact of revised fees and charges. The impact of our adjustment  is a decline in PAT by 5.21% YoY to N186.6 billion over FY 2020 (previously 5.3% YoY expansion in PAT). We now have a FVE of N35.16/share (previously: N38.85/share). GTB had a good run over the past few months, up by 35% from 24^th September till date, with yesterday’s close price now trading close to our FVE. We have therefore downgraded our rating to a SELL (previously: BUY). Overall, while the sector margins continue to tighten, we believe the recent approval to commence the formal process of the bank restructuring to a financial holding company and diversify into the pensions and payment business should help mitigate the risk to its earnings going forward. GTB trades at a current P/B of 1.42x with an ROAE of 26.3%.