Guaranty Trust Bank Plc: Remarkable half-year performance points ahead

GuarantyTrust Bank Plc (GTBank) is an internationally focused commercial bank providing a range of banking products and services to corporate, commercial, and retail customers in Nigeria, West Africa, and Europe.The company focuses on acquiring and managing strategic businesses that create long term shareholders’ returns and socioeconomic impact. The Bank’s management recently released its audited half-year result for the period ended June 30th 2017. The performance metrics shows substantial positive growth in revenue and profitability compared to the corresponding period of 2016 as the economy finds a stable business terrain through the CBN intervention in meeting the high foreign exchange demand. Also, Nigerian Bureau of statistics shows a declining inflation. The Directors recommend the payment of interim dividend of N0.30k per ordinary share of 50 Kobo in the current financial year, 2017.

TOP-LINE EARNINGS ROSE MODESTLY

GuarantyTrust Bank Plc posted an increase of 2.01% in gross earnings to N214.10 billion in June 2017 from N209.87 billion in the corresponding period of 2016.This is a deviation from the Bank’s regular growth believed to arise from non-interest income which reflects a massive drop of 76.45% in other income. Interest income grew by a significant figure of 51.11% to N165.88 billion compared to N109.78 billion recorded over the same period of 2016. Interest expense on the other hand grew by 18.54% to N36.35 billion in June 2017 from N30.66 billion recorded in June 2016.The high and constant interest rate environment throughout the period and an unchanging Banks’ Cash Reserve Ratio (CRR) resulted in increase in competition for deposits amongst banks but GTBank was able to manage its interest expense. Expectedly the bank’s net interest income grew notably by 16.60% to N83.68 billion in June 2017 from N71.77 billion in the corresponding period of 2016.

OTHER INCOME AND FEES EARNED LEADS TO SIGNIFICANTDECLINE IN NON-INTEREST INCOME

The Bank reported non-interest income of N48.21 billion for the halfyear ended, June 2017 from N100.09 billion recorded in the corresponding period of 2016; reflecting a substantial decline of 51.83%.The performance indicates that fee and commission dropped by 22.26% on the back of substantive decrease in income generated from e-business products and services - which suitably replace the phased out Commission on Turnover (COT) by the CBN – and transfer related charges which decreased by 61.37% and 46.35% respectively. Also, other income decreased by 76.45% to N14.52 billion from N61.67 billion. Boosting profitability is increase in net gains on financial instruments classified as held for trading which rose by 141.38% to N5.66 billion from N2.35 billion over the period reviewed.

NOTABLYGROWTH IN PROFITABILITY

The Bank’s well venerated operational efficiency is a tradition that GT Bank strongly upholds.The Bank has been able to consistently sustain its effective cost management strategies and hence profitability. Despite running a leaner branch network compared to its peers, the Bank conveniently generates more competitive profit year after year.This renowned efficiency is also sustained in the period under review as the Bank grew operating expenses by a 23.98% to N67.83 billion from N54.71 billion recorded in 2016. The growth in non-interest income steered profitability higher. Thus, pretax profit grew notably by 17.99% to N101.10 billion in June 2017 from N85.69 billion in in the corresponding period, June 2016, while net income grew by 16.60% to N83.68 billion from N71.77 billion over the same period.

IMPROVEMENTIN ASSETQUALITYAND KEYFINANCIAL METRICS

GTBank maintained its leading position in terms of margin and cost efficiency. Pre-tax profit margin rose to 47.22% from 40.83% over the period while net income margin also followed suit with an increase to 39.08% from 34.20% during the same period. In addition, the Bank’s cost to income ratio also rose marginally to 40.00% in June 2017 from 39.00% in June 2016. At 48.52%, the Bank’s liquidity ratio remains above the minimum regulatory requirements of 30% while capital adequacy ratio becomes stronger at 23.10%, well above the regulatory requirement of 15%. In relation to assets quality, nonperforming loan (NPL) ratio drop to 3.71% in June 2017. Furthermore, the Bank shareholder’s fund improved by 6.55% to N538 billion in June 2017 from N504.90 billion as at December 2016.The Bank’s return on assets and shareholders’ equity rose remarkably. Return on average asset (ROA) stood at 2.59% in June 2017 while return on equity (ROE) stood at 15.55% over the period under review.

BRIGHTOUTLOOK LEADSTO BUY RECOMMENDATION

The CBN’s foreign exchange policies have resulted in stabilizing the economy as foreign exchange currencies become readily available and predictable. Hence, inflation has dropped for five months consecutively to a rate of 16.01% in June 2017.The CBN has maintained the CRR at a high level with a view to maintaining price stability. Despite the regulatory headwinds prevalent in the previous year which saw inflation soar to 17.70% as at September 2016 from 9.4% a year ago, MPR holds stance at 14% and the CRR on all public sector deposits at 22.5%. While this policy aimed at controlling monetary liquidity in the economy foreshadows negative impact on the banks’ operations, the Bank’s management is capable of increasing performance that will further strengthen earnings, income generation capacity which includes non-interest income and growth in liquidity base. We maintain our projection of N469.34 billion for gross earnings and net income of N159.60 billion for the financial year ending December 2017, leading to a forward EPS of N5.91. Using an adjusted industry price to earnings multiple (PE) of 10.06x, we arrive at a six-month average target price of N45.49. Since this represents an upside potential of 22.60% on the current stock price of N37.01, we therefore recommend a BUY.

WHILE THIS POLICY AIMED AT CONTROLLING MONETARY LIQUIDITY IN THE ECONOMY FORESHADOWS NEGATIVE IMPACT ON THE BANKS’ OPERATIONS, THE BANK’S MANAGEMENT IS CAPABLE OF INCREASING PERFORMANCE THAT WILL FURTHER STRENGTHEN EARNINGS, INCOME GENERATION CAPACITY WHICH INCLUDES NONINTEREST INCOME AND GROWTH IN LIQUIDITY BASE