- FY’19 Interest Expense expectation revised 8% down
- Loan book growth expectations revised down to 5%
- FY’19 profit forecast upgraded to ₦219.9 billion (Previous: ₦208.9 billion)
- TP raised to ₦51.49
Strong Fees and Commissions growth props top line
GTBank closed the H1’19 period with impressive scorecards across key profitability metrics. The Bank achieved Gross earnings of ₦221.8 billion for the period, 2% lower y/y and 1% behind our forecast. This was due to the bank achieving interest income of ₦74.5 billion in Q2’19, flat q/q but 1.7% shy of our Q2’19 estimate. Net interest income of ₦58.1 billion also came in flat q/q, albeit 7.5% above our Q2’19 estimate following lower than expected cost of funds. For H1’19, Net Interest Margin (NIM) dipped marginally y/y to 9.55% from 9.61% in H1’18 (Q1’19: 9.9%). The other contributor to topline – Non-interest income (NII) was up 3.6% q/q in Q2’19 to ₦37.1 billion; H1’19 NII also increased 13% y/y in line with our estimate, to contribute 32.9% to Gross Earnings from 28.6% in H1’18. Growth in NII was driven by y/y increments of 29% and 13% respectively in Fees & Commissions and other income which offset the 25% decline in net gains on financial instruments in H1’19. Consequently, Operating Income grew 1.3% q/q and 3.7% y/y to ₦95.3 billion in Q2’19 and ₦189.4 billion in H1’19.
Optimal cost management improves cost-to-income
The bank achieved an H1’19 cost-to-income ratio of 37.6% (H1’18: 38.8%) closely in line with our estimate (37.4%). The bank also recorded flattish growth in Opex (+0.4% y/y), with personnel cost unchanged at ₦18.6 billion, while other operating expenses moderated to ₦39.4 billion from ₦42.0 billion in H1’18. Consequently, all our FY’19 operating cost estimates remain unchanged as GTBank continues to lead in operational efficiency across the banking sector.
FY’19 Asset quality remains a priority over loan growth
The 1.6% YTD growth in net loans achieved in Q1’19 moderated to 1.0% by H1’19 from ₦1.262 trillion as at December 2018 to ₦1.274 trillion, as the bank’s retail penetration strategy was constrained by the operating environment during the review period. We believe the bank will struggle to attain the 10.0% y/y loan growth target and have revised our expectation downward to 5% y/y with greater optimism on an improvement in FY’19 asset quality via recoveries. H1’19 NPLs reduced to ₦91.6 billion (FY’18: ₦99.4 billion), moderating the bank’s NPL ratio by 50bps to 6.8% with declines across major sectors excluding general commerce, manufacturing, services and individuals. As such, we project a FY’19 NPL ratio of 5.8% for the counter, supported by the aforementioned recoveries from the telecoms sector which are scheduled to berth by September 2019.
Valuation becomes more compelling
We adjusted some of the line items based on the variance from our previous estimates. We slightly revised our FY’19 Net Interest Income to ₦227.1 billion (Previous: ₦223.4 billion) due to the lower realized Interest Expense. Thus, our PBT forecast is raised to ₦253.9 billion from ₦215.6 billion to reflect the bank’s strong cost efficiency. Overall, we expect PAT to print at ₦219.8 billion in FY’19 (FY’18: ₦183.8 billion), yielding a forward EPS of ₦7.47, DPS of ₦3.41 and a revised value estimate of ₦51.49 (previous: ₦50.20), offering a
potential upside of 89.6% on current market price, thus we maintain our BUY recommendation on the stock.