Guaranty Trust Bank Plc: Cheap Funding Cost Underpins Profitability

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Guaranty Trust Bank Plc, in its recently released financial results for the first quarter ended March 31, 2020, reported a 2% year-on-year growth in gross earnings, from N110.33bn in Q1’19 to N112.87bn in Q1’20. Within the gross earnings, interest income grew by 3% year-on-year, from N74.48bn in Q1’19 to N77.04bn in Q1’20, while non-interest income remained flat at N35.83bn in Q1’20 (Q1’19: N35.84bn). Operating income recorded a 6% year-on-year growth, from N92.86bn in Q1’19 to N97.98bn in Q1’20; while operating expenses grew by 11% year-on-year, from N92.86bn in Q1’19 to N97.98bn in Q1’20. Profit before tax grew by 2% year-on-year, from N56.98bn in Q1’19 to N58.20bn in Q1’20. Also, profit after tax grew by 2% year-on-year, from N49.30bn in Q1’19 to N50.07bn in Q1’20.

Solid Performance Maintained on Interest Income Lines

In continued response to the Loan-to-Deposit Ratio (LDR) policy directive of the Central Bank of Nigeria, combined with the sustained lower yield environment in Q1’20, the Group expanded its loan book, as reflected in the 23% year-on-year growth in loan and advances to customers, from an average of N1.27trn in Q1’19 to an average of N1.56trn in Q1’20. The double-digit growth in loan book spurred the 6% year-on-year increase in interest income on loans and advances to customer, from N43.74bn in Q1’19 to N46.41bn in Q1’20. However, asset yield earned on loans and advances to customers declined by 188 basis points from 13.77% in Q1’19 to 11.89% in Q1’20. As mentioned above, the lower yield environment resulted in a price war in the industry, thus prompting a repricing of risk assets in the markets.

Meanwhile, interest income earned on cash and cash equivalents declined by 57% year-on-year, from N3.91bn in Q1’19 to N1.67bn in Q1’20. The decline was driven by lower volume and price of the asset in Q1’20. We posit that the need to put more cash in risk-assets due to the CBN’s LDR policy, and to avoid a CRR debit possibly resulted in the 29% decline in the value of cash and cash equivalents (from an average of N759.86bn in Q1’19 to an average of N537.92bn in Q1’20). Furthermore, asset yield on cash and cash equivalents declined by 82 basis points from 2.06% in Q1’19 to 1.24% in Q1’20. Hence, the impact of lower cash and cash equivalents, as well as lower yields in Q1’20 led to the 57% decline in interest income on cash and cash equivalents. The 57% decline recorded in interest income on the cash and cash equivalents offset the 6% growth in interest income on loans and advances to customer.

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Interest income on investment securities, which contributed 33% to total interest income in
Q1’20, grew by 11% year-on-year from N22.95bn in Q1’19 to N25.41bn in Q1’20, despite a 200 basis points decline in asset yield on investment securities (from 14.02% in Q1’19 to 12.48% in Q1’20). We note that the 24% year-on-year growth in the value of investment securities, from N654.79bn in Q1’19 to N814.42bn in Q1’20, drove the increase in the interest income earned on that line. Essentially, the higher volume made up for the price decline. From our analysis, we identified that the overall growth in interest income was supported by the double-digit growth in interest income on investment securities.

Lower Cost of Funds on the Back of Excess Liquidity

Interest expense on deposits from customers declined by 21% year-on-year, from N13.30bn in Q1’19 to N10.54bn in Q1’20, despite a 13% year-on-year increase in total deposits from customers from an average of N2.34trn in Q1’19 to N2.65trn in Q1’20. Therefore, cost of funding from customers’ deposits declined by 60 basis points from 2.27% in Q1’19 to 1.73% in Q1’20. We attribute the lower cost of funds to the excess liquidity in the system, following series of the CBN’s policies that resulted in limited investment opportunities for local asset managers and corporates. On the other hand, interest expense on other borrowed funds also declined by 2% year-on-year, from N1.76bn in Q1’19 to N1.73bn in Q1’20. Meanwhile, other borrowed funds increased by 9% year-on-year, from an average of N176.79bn in Q1’19 to N160.59bn in Q1’20.

Overall, the Group’s total cost of funds on interest-bearing liabilities lowered from 2.48% in Q1’19 to 1.73% in Q1’20. Interest-bearing liabilities, however, grew by 13% year-on-year, from an average of N2.62trn in Q1’19 to N2.95trn in Q1’20. Consequent to the cheap funding cost in Q1’20, net interest income advanced by 10% year-on-year, from N58.22bn in Q1’19 to N64.28bn in Q1’20.

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Lower Bank Charges Take Its Toll on Non-Interest Income

Fee and commission income declined significantly by 22% year-on-year, from N18.56bn in Q1’19 to N14.46bn in Q1’20. The lower-income earned on the line was mainly driven by a decline in the following line items: credit-related fees and commissions (-39% YoY from N4.55bn in Q1’19 to N2.78bn in Q1’20), corporate finance fees (-59% YoY from N2.33bn in Q1’19 to N944.36mn in Q1’19), account service maintenance charges (-32% YoY from N1.37bn in Q1’19 to N924.51mn in Q1’20), E-business income (-22% YoY from N3.18bn in Q1’19 to N2.49bn in Q1’20), the commission of foreign exchange deals (-12% YoY from N1.98bn in Q1’19 to N1.73bn in Q1’20). We recall that the CBN, in December 2019, slashed the fees and charges on some banking services in a bid to encourage financial inclusion in the economy.

Trading gains, however, rose by 27% year-on-year, from N4.25bn in Q1’19 to N5.42bn in Q1’20 – driven by a 50% spike in foreign exchange gains from N2.99bn in Q1’19 to N4.49bn in Q1’20. Bonds trading gains also grew by 68% year-on-year, from N366.67mn in Q1’19 to N614.57mn in Q1’20. However, treasury bills trading gains declined by 65% year-on-year, from N887.61mn in Q1’19 to N308.57mn in Q1’20. Nonetheless, the foreign exchange trading gains was enough to make up for the decline in treasury bills trading gains.

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Other income also grew by 22% year-on-year, from N13.04bn in Q1’19 to N15.95bn in Q1’20. The growth in other income was spurred by a 220% foreign exchange revaluation gains from N2.64bn in Q1’19 to N8.45bn in Q1’20. We understand that the recent exchange rate devaluation drove the line. The Group, as at FY’19, was about N505.15bn long on USD. In addition, FX discounts and recoverable surged by 310% year-on-year, from N1.14bn in Q1’19 to N4.69bn in Q1’20.

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The upsides recorded on ‘other income’ and ‘net trading gains’ offset the decline in ‘fee and
commission income’. Hence, non-interest income remained flat at N35.83bn in Q1’20 (Q1’19: N35.84bn).

Higher Cost-to-Income Ratio Dampens Bottomline Growth

The Group’s cost-to-income ratio increased to 41% in Q1’20 from 39% in Q1’19. The higher cost-to-income ratio resulted from the higher increase in operating expenses relative to the increase in operating income. Operating expense increased by 11% year-on-year from N35.88bn in Q1’19 to N39.77bn in Q1’20, occasioned by an 11% increase in AMCON expenses (from N7.72bn to N8.59bn), a 5% increase in other operating expenses (from N31.29bn to N32.92bn), and a 49% increase in depreciation and amortisation charges (from N4.59bn in Q1’19 to N6.85bn in Q1’20).

Accordingly, profit before tax grew by 2% year-on-year, from N56.98bn in Q1’19 to N58.20bn in Q1’20. Profit after tax also grew by 2% year-on-year, from N49.30bn in Q1’19 to N50.07bn in Q1’20.


We revise our EPS estimate slightly downwards from N7.25 (in our FY’19 report) to N7.20. The rationale for the downward revision is on the basis of our expected lower fee and commission income for the year. Although we factored the possibility of FX revaluation gains in our estimate, we believe that the slowdown in fee and commission income could dampen the upside. We also expect to see increased operating expenses, induced by a higher depreciation charge.

Our basis for a higher depreciation and amortisation charges is due to our expectation of
increased investment in intangible assets, software, and technology, to drive a possible
increased level of activities on the Group’s digital platforms, amid the coronavirus-induced

On interest income, we maintain our assumption that a possible decline in economic activities in the subsequent periods of the year, owing to the coronavirus-induced lockdown, could have a bearing on the capacity of some companies to grow output. Hence, there is the possibility of slow growth in loan book in the near to midterm.\


We arrived at a fair value of N22.53 for GTB (previous N16.03), majorly resulting from a lower estimated equity risk premium of 16% (previous: 19%). At the current market price of N21.10, the stock offers a price return of 8% and a dividend yield of 13%. Therefore, given an expected total return of 21%, we upgrade our rating to a BUY.

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Guaranty Trust Bank Plc: Cheap Funding Cost Underpins Profitability - Brand SpurGuaranty Trust Bank Plc: Cheap Funding Cost Underpins Profitability - Brand Spur

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