GTBank: Lower Reinvestment Income Depress Earnings

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Guaranty Trust Bank sort codes GTBank Plans Kenyan Acquisition Brandspurng
Photographer: Issouf Sanogo/AFP/Getty Images

Guaranty Trust Bank Plc (GTBank) in its Q1 2021 earnings result, declared a 6% YoY gross earnings decline from N112.87bn in Q1 2020 to N106.17bn in Q1 2021.

In the breakdown of gross earnings, interest income declined by 22% YoY from N77.04bn in Q1 2020 to N60.31bn in Q1 2021; while non-interest income grew by 28% YoY from N35.83bn in Q1 2020 to N45.86bn in Q1 2021.

Operating income declined by 5% YoY from N97.98bn in Q1 2020 to N93.47bn in Q1 2021. Meanwhile, operating expense remained flat in Q1 2021 at N39.78bn (Q1 2020: N39.77bn).

GTBank Plans Kenyan Acquisition Brandspurng
Photographer: Issouf Sanogo/AFP/Getty Images

As a result, the Group’s cost-to-income ratio advanced by 200 basis points from 41% in Q1 2020 to 43% in Q1 2021. Consequently, profit before tax dipped by 8% YoY, while profit after tax declined by 9% YoY from N50.07bn in Q1 2020 to N45.55bn in Q1 2021.

Low Interest-rate Environment Bites Hard into Earnings

The Group recorded a material decline across its major interest-income lines in Q1 2021. Interest income on loans and advances declined by 5% YoY from N46.41bn in Q1 2020 to N44.32bn in Q1 2021, despite a 1% YoY growth in average total loans and borrowings to customers from N1.56trn in Q1 2020 to N1.65trn in Q1 2021.

As was the trend in 2020 across the banking industry, the sustained low yield environment had an impact on interest earnings on risk assets. Interest income on investment securities declined at a steeper rate, by as much as 67% YoY from N25.41bn in Q1 2020 to N8.30bn in Q1 2021. Meanwhile, investment securities grew by 22% on a YoY basis, from an average of N814.42bn in Q1 2020 to N997.29bn in Q1 2021.

We attribute the significant decline to reinvestment risks during the period under review. We note that the Group’s interest income was resilient in FY 2020, relative to the performance of peers. The management linked the interest income resilience in FY 2020 to its investment strategy of going long on longer-tenor assets before the market-wide yield decline, therefore, enabling the Group to benefit from higher yields when interest rates declined.

In our view, we posit that these assets probably matured, hence reinvestment was done at significantly lower yields. The decline in interest income on investment securities was the core driver of the overall decline in total interest income.

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Solid Growth Across Non-Interest Income Lines Support Income

GTBank’s non-interest income grew by 28% YoY from N35.83bn in Q1 2020 to N45.86bn in Q1 2021. Fee and commission income increased by 22% YoY from N14.46bn to N17.57bn, driven by the Group’s business income.

Net trading gains on financial instruments grew by 63% YoY from N5.42bn in Q1 2020 to N8.85bn in Q1 2021, driven by foreign exchange gains. Lastly, other income grew by 22% YoY from N15.95bn in Q1 2020 to N19.43bn in Q1 2021, driven by increased debt recoveries.

Fee and commission income accounted for 31% of total non-interest income growth, while net trading gains and other income accounted for 34% and 35% of total non-interest income, respectively.

Interest Income Decline Weighs Heavily on Bottomline

The material decline in interest income resulted to a 5% YoY decline in operating income from N97.98bn in Q1 2020 to N93.47bn in Q1 2021. Although the Group tried to be cost-efficient during the period, as reflected in the unchanged operating expense at N39.78bn in Q1 2021 (Q1 2020: N39.77bn), it was not enough to prevent an 8% YoY decline from N58.20bn in Q1 2020 to N53.68bn in Q1 2021.

Outlook

We expect GTBank’s earnings to recover in the subsequent quarters, on the back of the rising trend of yields in the fixed income market. We also expect to see sustained solid growth in non-interest income – partly due to a low base in Q2 2020, and partly due to its solid investment portfolio related to FX positions and swaps.

We revised our FY 2020 earnings per share (EPS) estimate, and adjusted it to lower by 7% to N7.21 (previous: N7.74), to reflect a combination of our future expectations and the released Q1 2021 results. Nonetheless, we arrived at a N39.09 fair value (previous: N37.03), to reflect our improved expectations on interest income and non-interest income growth.

In arriving at our estimate, we did not incorporate the planned HoldCo structure announced by the Group. At the current market price, we believe that the stock offers a 43% total return (price return: 33%; dividend yield: 10%).

Therefore, we recommend a BUY.