Guaranty Trust Bank (GTB) reported 22% YoY growth in gross earnings to N154.6bn for the 9 months to June 2012. PBT and PAT grew 48% and 59% YoY to N75.6bn and N63bn respectively.
• YoY growth was driven by increased exposure to securities and a relatively large loan book amid a higher a rise in interest rates over the review period. A tighter lid on operating costs and significantly lower impairment charges were primarily responsible for the improvement in bottomline. Asset creation stunted by contraction in funding base
• However, GTB’s balance sheet fell 5% QoQ to N1.5 trn driven by a 6% QoQ contraction in deposits to N994 billion. Total earning assets declined an even faster 9% QoQ reflecting shrinkage in both liquid assets (-25%) and loans (-7%) while securities grew marginally.
Consequently, interest income contracted 16% QoQ to N35.5bn (Q1: N41 bn).
• Although we made it clear in our H1 review that we envisaged limited scope for additional growth from for the bank higher yield segments —and in spite of our expectations for weaker performance for the industry communicated in our recent industry update1--we were surprised by the magnitude of the interest income slowdown embedded in 9M 2012 results.
Gross earnings were further pressured by a 64% QoQ decline in non-interest income—which had helped boost earnings substantially through H1—to N6.4bn (Q1: N11bn. Whilst GTB provided no details, the magnitude of contraction hints broad based contraction in this earning segment with regulatory actions in the quarter likely to have affected forex and trading income in particular. On the whole, revenue shrank 33% QoQ to N41 bn.
Sharply lower costs help limit impact on profits
• Interest expense came in at N8.4bn, 12% lower QoQ. However, WACF worsened a marginal 15bps QoQ to 3.1%, by our estimates. Interest expense came in at 7% below our pro-rated FY estimates from being 6% ahead as at halfyear.
• However, opex contracted 39% QoQ to N12 bn (H1 avg.: N19bn) likely driven by slower growth in ‘other opex’ and ‘general and admin expenses. Annualized 9M 12 opex (~N49.8bn) is 14% below our FY estimates with CIR of 39% tracking 240bps lower than we envisaged. A mild N400mn write-back also reduced impairment charges to N2bn, 62% behind our FY estimates.
• These sharp cost reductions helped limit the impact of the significantly weaker revenues on profits. Indeed the lower costs boosted PBT and PAT margins 200bps and 100bps to 49% and 41% respectively.
Nevertheless, a significantly weaker quarterly performance
• Nevertheless, YoY improvements mask a sharp deterioration in quarterly performance. PBT declined 25% QoQ to N21.9bn (H1 avg.: N27bn) while PAT fell 29% to N18bn (H1 avg.: N22.5bn). Although a relatively strong Q2 performance helps to worsen these comparisons, deterioration is clearly evident even relative to Q1 results.
• The reversal is also evident in performance relative to our estimates on annualized basis. Topline and operating income moved from being 3% and 2% ahead of expectations in H1 to both being 8% behind by 9M 2012. PBT and PAT went from 52% and 59% ahead as at H1 12 to being in line by current results. GTB is also well behind on own FY targets for loan (15%) and deposit (25-30%) growth, respectively tracking at 3% and -4% YTD.
Lack of footprint starting to tell?
• Whilst we do not discount the possibility of an accounting change that necessitated a possible derecognition of both revenues and expenses impeding Q3 performance, funding challenges are clearly at the heart of the challenges during the quarter. The deposit contraction appear to reflect a conscious effort to reject high-cost funds and relatively flat funding costs reflects some success with improving funding mix as proportion of low-cost retail deposits has increased from 41% in December 2011 to 48% by half-year. However, the real question is whether this is coming rapidly enough to sustain significant asset creation.
• Indeed GTB’s ability to maintain one of low the lowest funding costs in the industry despite its branch network being one of the smallest in the industry is no mean feat. Nonetheless, heightened industry competition could further exacerbate its disadvantages in this area, possibly constraining future revenue growth.
Varying run-rates necessitate adjustment to forecasts
• Despite our prior optimism that flat deposit base since Q4 2011 will eventually give way to moderate growth, the contraction in Q3 2012 has necessitated a downward revision to our deposit growth forecast to match 9M 2012 average.
Thus, while we adjusted our asset yield estimates 20bps higher to match 9M avg of 11.7%, lower earning asset volumes has driven our revenue estimates 7% lower to N209bn for FY 2012.
• The ratio of net interest to interest income has held steady at 77% through 2012 and we upgrade our estimates by 50bps to match this. This reflects our view that any funding challenges would have a greater impact on volumes than costs, pending a change in GTB’s strategy in this regard.
• In addition, in view of significant cost dips, we revised cost-to-income ratio 80bps lower to match 9M 2012 average. We also reduced our provisioning estimates by ~39% to N4.2bn in light of significantly lower run-rates implied in the 9M results, reflecting 30bps downward adjustment to our cost-of-risk estimate to 0.5%. We have tempered revisions in light of 10pps dip in coverage ratio over the course of H1 2012 which raises the probability new loan impairments contributed to sharp contraction in loan book.
• Overall, the impact of our revisions to revenue and cost forecasts largely offset themselves over much of our forecast horizon and leaves PAT estimates for FY 2012 N1bn lower at ~N82 bn which translates into still strong PAT margins of 39%.
We maintain BUY rating as upside remains significant
• As hinted earlier, sharp variation in Q3 performance implies drivers may involve other factors and we would seek clarification from management on this. On a positive note, impact of weaker performance on bottom line is limited relative to our rather conservative estimates and still appears on track to match it, absent a significant deterioration in Q4 12. Furthermore, we note that the weaker performance is relatively to GTB’s own lofty standards and highlight that its primary advantages of operational efficiency and industry leading profitability metrics remain intact. For the time being, these appear to still justify its premium P/BV of 2.2x relative to 1x for peers while PE of 7.8x remains at a discount to the 10x peer average. Based on the 29% upside potential relative to our fair value estimate of N26, we retain a BUY rating on the stock.
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