Guaranty Trust Bank Plc has released H1-2017 results, wherein gross earnings grew marginally by 2.01 per cent y/y, supported by a surge in interest income (+51.11 per cent y/y), which more than offset the significant decline in non-interest income (-52.85 per cent y/y).
In addition, the lower credit loss provisioning during the period supported the bottom-line, as such, PBT grew by 10.64 per cent y/y (91 bps above our estimate) while PAT grew at double-digit (13.11 per cent y/y, 22.11 per cent above our estimate), resulting in annualized EPS of N3.00 (above our estimate of N2.33).
Consistent with its dividend payment, GUARANTY is proposing an interim dividend of N0.30 (a 20 per growth over N0.25 in the previous year) – translating to a payout ratio of 10.55 per cent and a dividend yield of 0.77 per cent.
The high y/y growth in interest income (2.98 per cent shy of our estimate) was on the back of growth in interest income on loans (rose 19.93 per cent ) and impressive gains on investment securities (+171.61 per cent y/y). The latter was driven by increases in available for sale (152.31 per cent y/y) and held to maturity securities (107.03 per cent y/y), following an increase in fixed income securities volume from the expansion in the NGN yield curve.
The cumulative impact of improved yields on loans and investment securities drove 298 bps y/y expansion in asset yields to 14.52 per cent.The significant contraction in NIR (a 3.47 per cent variance from our estimate) broadly reflects the decline in FX revaluation gain, given the limited legroom for a sizeable exchange rate gain with the NGN fairly stable during the review period.
On the funding side, we attribute the increase in interest expense (up 18.54 per cent y/y), despite a 25.22 per cent y/y decline in debt securities finance, to the relatively tight liquidity in the system which drove upward repricing of deposits (interest expense on deposits rose 18.42 per cent y/y). Also, the bank recorded a surge in interest expense on borrowed funds (81.92 per cent y/y).
However, the expansion in asset yields more than offset the growth in funding costs (by how many bps?), and as a result, NIM expanded 201 bps y/y to 10.40 per cent , from 8.39 per cent in H1-16. Still on the positives, cost of risk shrank 203 bps y/y to 0.45 per cent , from 2.48 per cent in H1-16, consequently, credit loss provisioning declined by 80.79 per cent y/y.
Specifically, on the performance in Q2-17, gross earnings grew marginally by 3.07 per cent q/q (-19.10 per cent y/y), 5.49 per cent below our estimate, while PBT and PAT declined by 1.13 per cent q/q (-16.46 per cent y/y) and 0.41 per cent q/q (-18.60 per cent y/y), respectively in line with our estimate. The q/q marginal growth in gross earnings broadly reflects the lackluster movement in interest income, while the bottom-line contraction was due to opex increasing by 12.70 per cent q/q (+54.32 per cent y/y), which more than offset the growth in NIR of 27.68 per cent q/q (-66.63 per cent y/y).
Over H1-17, opex (up 38.38 per cent y/y) rose significantly, due to hikes in other opex (59.29 per cent y/y), personnel expenses (12.77 per cent y/y), and depreciation expense (12.41 per cent y/y). The y/y opex pressure, by our understanding, stemmed from a one-off AMCON fee booked in line with International Financial Reporting Interpretations Committee (IFRIC) 21, and FX translation impact of subsidiaries’ opex. Consequently, cost-to-income ratio (CIR) expanded by 120 bps y/y to 40.2 per cent.
For the rest of 2017, we expect GUARANTY’s sizeable portfolio of fixed income instruments and growth in FX interest income will drive growth in interest income. That said, we believe NIR growth will be constrained by the relative stability of the NGN, which limits the possibility of any significant revaluation gains. While we expect cost of funds to remain elevated in the course of the year, we believe the impact on NIM will be offset by higher assets yield. Based on our TP of N38.57, we have a HOLD recommendation on the stock. Our estimates are under review.