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Initial view - GTB Plc FY 2020 - Lower funding cost propels higher earnings

• GTB recently published its audited FY 2020 result, with PBT and PAT expanding by 2.8% YoY and 2.3% YoY respectively. Key driver for the growth in earnings were lower funding cost (-27.4% YoY) and slight expansion in interest income (+1.5% YoY). In addition, expansion in Non-interest Revenue (+8.9% YoY) provided support to growth in earnings. GTB’s FY 2020 PAT of N201.4 billion came in slightly lower than our estimate of N207.4 billion, representing a 3% deviation from our estimates. The deviation largely mirrored a higher-than-expected outturn in operating expenses. Hence, GTB declared a final dividend of N2.70/ share (final dividend in 2019: N2.80/share), which translate to a dividend yield of ~9.1% based on last closing price. This brings the total dividend for the financial year to N3.00/share.
• As earlier stated, funding cost was lower by 27.4% YoY with weighted average cost of fund (WACF) contracting by 103bps. The decline in funding cost largely reflected lower interest expense on customer deposits (-28% YoY), borrowed funds (-55% YoY) as well as improved CASA mix (FY 20: 89%, FY 19: 85%). Meanwhile interest income rose by 1.5% YoY as GT Bank grew its loan book by 2.5% YoY to N1.66 trillion. However, average yield on assets was down by 130bps YoY to 8.9%. Overall, net interest income rose by 9.6% YoY, while its related margin contracted by 5bps reflecting a faster decline in asset yield.
• Further down the line, GTB recorded a growth of 8.9% YoY in Non-Interest revenue against the backdrop of foreign exchange revaluation gain (+232% YoY) and trading income (+17% YoY). Meanwhile, cost of risk expanded by 7bps YoY to 1.0% as GTB reported loan loss provisioning of N16.4 billion (+240.5% YoY). On other fronts, ocst to Income ratio rose by 104bps bps YoY over 2020 to 36.7% (FY 2019: 35.6%) following a faster growth in operating expenses (+12.6% YoY), relative to operating income (+9.4% YoY).
• Streamlining to the quarterly numbers, GTB reported a better performance compared with the FY trend. Precisely, PBT and PAT printed higher by 24.8% QoQ and 25.7% QoQ respectively, which is reflective of improved funding cost and sturdy expansion in NIR.
• On funding cost, lower interest expense on deposits from banks (-143% QoQ) and customers (-34% QoQ) were the major drivers. Elsewhere, higher FX revaluation (gain of N35 billion in Q4 20 vs trading loss of N280 million in Q3 20) and net fee income (+36% QoQ) - a fallout of higher credit related fees (+8% QoQ), transfer related charges (+223% QoQ), and E-business income (+6% QoQ) - supported total NIR.
• On margins, NIMs contracted by 29 bps QoQ following a faster decline in asset yield (-48 bps QoQ), relative to WACF (-22bps QoQ). Interest income over the quarter was pressured, declining by 2.7% QoQ, due to the lower interest rate environment. This mirrored lower interest earnings on investment securities by 4.2% QoQ.

The stock currently trades at a current P/B of 1.18x which is at a premium to its one-year average of 1.08x and a discount to its five-year historical average of 1.56x. Our last communicated FVE on GUARANTY is N35.16 which translates to an OVERWEIGHT rating on the stock. We will revisit our numbers after further discussion with management.