GTCO Plc Q1 2022- Higher Costs Exert Pressure on Profitability
- The recently released Q1 2022 results for the lender reflected a 12.7% growth in Gross Earnings to ₦119.6bn. We traced the growth to the combined rise in interest and non-interest income. The Gross Earnings (GE), when annualized is largely in line with our projected FY 2022 estimate of ₦481.5bn. However, Profit after Tax (PAT) dragged by surging expenses declined 5% to ₦43.2bn. This constitutes a slight deviation from our Q1 2022 projected PAT.
- Interest Income increased 16.0% to ₦63.9bn following the increase (14.8%) in income on loans to customers from ₦44bn to ₦51bn. We suspect that this might have been supported by repricing of loans because loans to customers only grew by 4.8% y/y to ₦1.7tn. The bank maintained its reluctance to grow loan book significantly as it seeks to keep Non-Performing Loans (NPLs) in check. Thus, we do not expect its full-year loan growth to exceed the management’s 10% guidance. Asset quality saw improvement as NPL ratio moderated to 5.94% (Q1 21: 6.0%, FY 21: 6.0%), further giving credence to the bank’s loan growth decision.
- Interest expense surged 70.7% to ₦13.4bn from ₦7.8bn, as interest paid on customer deposits moved from N6.9bn to N12.7bn. This is partly due to a 12.2% increase in customer deposits to ₦4.0tn from ₦3.6tn in Q1 2021. Annualized cost of funds surged 44bps to 1.26% reflecting higher deposit rates. This is unclear given that the proportion of cheap deposits (CASA) remained at 86% of total deposits in Q1 (same as in Q1 2021). On the back of a sharp rise in interest expense, Net Interest Income only grew by 9.1% despite the growth in Interest Income.
- We envisage that the bank would stick to its FY loan growth guidance of 10%. Also, we may see loan repricing in the second half of the year, in a likely move to boost interest income. Non-interest Revenue should sustain growth and is expected to increase its relevance to about 41% of Gross Earnings in 2022. We expect the lender’s Q2 results to reflect the initial impact of the pension and asset management businesses. Nonetheless, we see minimal additions to topline this year. We maintain our target price of ₦33.22 for GTCo as the bank remains resilient and poised for increased Interest and Non-Interest Revenue. When compared to market price as of previous market close, this represents a 38% upside. We rate GTCO a STRONG BUY
ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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