In the first half of the year, Guaranty Trust Bank Plc (GUARANTY)’s gross earnings were pressured by a mix of adverse regulatory conditions and the COVID-19 pandemic. Worst hit was fee-based income (net) which declined by 51.81% YoY to NGN22.29bn, despite significant volume growth across the bank’s digital and USSD banking platforms.
The cap on credit-related fee and revised ebanking charges were jointly responsible for the depressed fee-based income performance. Interest income growth also moderated to 3.17% YoY (vs 3.43% YoY in Q1:2020) owing to a decline in asset yield to 11.86%.
Nevertheless, the 6.51% YtD growth interest-earning assets, is promising considering interest rates are expected to remain low in the near term. As observed among peer banks, trading and FX gains remained crucial to overall gross earnings which grew by 1.47% YoY to NGN225.14bn. Management has however guided that the bank will focus on growing quality risk assets, and leveraging its payments capabilities to grow core earnings in the second half of the year.
GTBank‘s performance was well within our expectations and we do not envisage any additional risks to gross earnings performance. Although the current recovery mode of the economy is consistent with Management’s guidance, we maintain our muted outlook for gross earnings in 2020FY as downside risks (lower interest rates and FX gains) nil out upside risks (volume growth).
Bottom Line and the Cost of Asset Growth
Net interest margin improved to 9.74% in H1:2020 (vs 9.55% in H1:2019) after flattening in Q1:2020. This was due to the sustained decline in cost of funds to 1.51%, which offset the decline in asset yield. Profit before tax however declined by 5.25% YoY to NGN94.27bn due to higher impairment charges necessitated by weakened credit conditions of obligors. This is however expected to improve in H2:2020 as result of loan book restructuring and pick-up of economic activities.
Regulatory charges (AMCON and NDIC) and depreciation were also major pressure points owing to the bank’s rapid growth in total assets. Thus, cost efficiency did not improve as Cost-to-Income ratio (CIR) stayed above Management guidance (40%) at 43.16%.
We expect costs to trend lower in H2:2020 as regulatory costs and COVID-19 related donations will not recur. As we do not foresee any additional risks to our earlier forecast, we maintain our projection for bottom line growth in 2020FY at 1.25% YoY.
Healthy Macro-Prudential Position Favors Loan Growth
Loans-to-Deposit Ratio remained below regulatory threshold at 56.82% as deposits grew faster than loans YtD. Management has however indicated that it is not keen on further deposits growth especially as the bank has surpassed its 2020FY target deposit growth. Thus, we expect the focus in H2:2020 to be on deployment of deposits to risk assets. The bank’s strong capital adequacy (22.90%) supports further loan growth even as the outlook for asset quality (with NPL currently at 6.80%) is positive. Furthermore, GUARANTY has largely been unscathed by the higher reserves policy due to its robust funding base and relatively efficient use of its assets.
In view of the planned conversion to a Holding Company with a more diversified income base by Q1:2021, GUARANTY’s outlook is promising. Although we maintain our 2020 EPS forecast as NGN6.77, we revise our target P/E to 3.95x from 3.76x to reflect the bank’s positive outlook. This yields a Target Price of NGN26.74, with an upside potential of 10.04%. Hence, we recommend a BUY.
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