EUR 4.00 For Business Accounts Only

Initial View - Guaranty Trust Bank Plc - Strong start to the year, growth to remain steady

• Guaranty Trust Bank released Q1 2019 number yesterday, showing strong growth across income lines. Beyond the income lines, the key numbers that stood out to us were the material decline in loan loss provision to just N651 million (Q4 18: N3.1 billion) and jump in operating expenses by 41.8% QoQ to N35.9 billion. Irrespective, Guaranty posted double-digit growth in EPS of 16.2% QoQ to N1.68.
• How the numbers stack up. Continuing the moderation in Q4 18, funding cost moderated further over Q1 19 to 2.4% (-36bps QoQ) with related interest expense declining 7.7% QoQ following lower interest payment on customers deposit and borrowed funds. Elsewhere, yields on assets contracted 22bps YoY to 10.3% a development we attribute to the expansion in the interest earning assets book, irrespective, interest income increased 7.3% QoQ. Consequently, net interest income increased 12.4% QoQ with related margin expanding modestly by 14bps QoQ. In terms of non-interest revenue (NIR), the bank reported stronger growth in net fee income to N18 billion (-42.6% QoQ), which combined with N13 billion (+13.6% QoQ) gain on the other income line supported the double-digit growth in NIR (+23.3% QoQ). Cost to Income ratio was recorded at 38.4%, higher than 31.5% as Q4 18, largely driven by the materially higher AMCON charge of N7.7 billion booked during the quarter.
• Balance sheet stood more liquid in the period with investment securities book expanding 9.5% YTD to N773 billion with a modest growth in loan book by 1.8% YTD to N1.3 trillion. On regulatory position, the bank’s liquidity ratio improved to 47.7% (41.4% in FY 18), NPL moderated to 7% (FY 18: 7.3%) with coverage ratio moderating to 90.1% (FY 18: 105.1%). However, capital adequacy ratio weakened to 22.3% (FY 18: 23.4). Deposit grew by 6% YTD to N2.4 trillion with CASA as a share of total deposit printing at 83% (FY 18: 84%).
• Growth to remain steady. In our stock update published in March (See report: ), we guided that NIR would dominate earnings story over 2019. We stated that while the convergence of the NIFEX-NAFEX over 2018 signals limited room for material revaluation gain in 2019, we expect the higher volatility of FX transactions by customers, gains on financial instruments (with management further reiterating appetite for government securities and our projected expansion in trading book by 50% YoY) and resilience in net fee income to still provide strong support for NIR. In the same vein, given the moderating yields on treasury assets, we reckoned that volume will be the play for the bank to book stronger growth in interest income. With the performance across income lines broadly in line with our guidance – net interest income, NIR, OPEX, PBT and PAT accounting for 26%, 25%, 28%, 25.5% and 25.7% of our full year estimates – we have left our model unchanged and maintain our FVE of N49.66/share with a STRONG BUY rating. GUARANTY trades at a FY 19E P/B of 1.63x, at a premium to ZENITH of 0.85x, which is justified given GUANRANTY’s strong ROE of 32.8% (ZENITH: 25.2%).

 More analysis to follow.