Guaranty Trust Bank Earnings up 14.8%

Guaranty Trust Bank (“GTBank” or “the Bank”) today, March 5, 2015 published its audited FY:2014 result on the floor of the Nigerian Stock Exchange (NSE), recording impressive growth in top and bottom lines amidst harsh operating environment. We present the highlights of the result and our 2015 estimates.

Leading the Pack: Earnings and PAT up 14.8% and 9.6%Y-o-Y
GTBank reinforced its leadership role in the banking space to be the first bank to publish its FY:2014 result on the floor of the Nigerian bourse. The Bank delivered positive growth in both top and bottom lines despite regulatory headwinds and an overall harsh operating environment that squeezed banks’ earnings in 2014 — as shown by Q3:2014 banks’ results. The Bank’s gross earnings advanced 14.8% from N242.7bn in FY:2013 to N278.5bn in FY:2014, 4.3% slightly higher than our N267.1bn forecast for FY:2014. In the same vein, PAT advanced 9.6% Y-o-Y to N98.7bn in FY:2014 relative to N90.0bn in the previous year, also 7.7% higher than our N91.6bn FY:2014 PAT estimate. However, GTBank’s PBT and PAT margins moderated to 41.8% and 35.4% in FY:2014, lower than 44.1% and 37.1% recorded in FY:2013 respectively. Accordingly, ROAE and ROAA weakened to 27.9% and 4.4% in FY:2014 compared to 29.3% and 4.7% in FY:2013 (Higher than Tier-1 Bank average ROAE:20.2% and ROAA:2.1%). GTBank stayed unrelenting in its cost leadership position, to remain the most efficient bank in Nigeria with a Cost to Income Ratio (CIR) of 43.4% in FY:2014, albeit slightly higher than 42.8% in FY:2013. This is however lower than its close peers – Zenith’s CIR of 62.4% as well as industry average of 61.5%in Q3:2014.

NIM Remained Pressure: Down to 7.5%
GTBank’s NIM deteriorated to 7.5% from 8.2% in FY:2013 against the backdrop of a significant 20.2% Y-o-Y rise in interest expense which doused the 8.2% Y-o-Y growth delivered in interest income in FY:2014. This substantial spike in interest expense can be attributed to amplified rivalry for deposits, bolstered by the CBN policy that increased CRR on private (from 12.0%to 20.0%) and public sector (from 50.0% to 75.0%) funds. This is also supported by the marginal increase recorded in its Cost of Funds (CoF) from 3.7% in FY:2013 to 3.8% in FY:2014. Nevertheless, this is significantly lower than the Tier-1 Banks’ average of 4.0%, reinforcing GTBank’s brand and vigorous retail franchise to attract cheaper deposits.

Sustained Bullish Growth in Risk Assets: Up 27.1% vs 28.6% in FY:2013
In a bid to cover up for lost income as a result of the hawkish CBN policies, the Bank sustained its aggressive loan book growth in 2014. GTBank’s Net Loans rose 27.1% Y-o-Y to N1.3tn in FY:2014, slightly lower than 28.6% Y-o-Y growth in FY:2013. However, we highlight the 146.0%Y-o-Y growth in impairment charges from N2.9bn in FY:2013 to N7.1bn in FY:2014. Consequently, the cost of risk doubled to 0.6% in FY:2014 from 0.3% in FY:2013 probably on the back of Bank’s exposure to the oil & gas space (28.0% of total loan advanced in Q2:2014) which has been significantly challenged. The Bank’s total assets advanced 12.0% to N2.4tn in FY:2014, funded primarily by loans (54.4% of total assets). Accordingly, Loans to Deposits ratio spiked to 77.7% in FY:2014 from 69.9% in FY:2013, 2.3% below the CBN statutory benchmark of 80.0%. This may limit its leeway to take advantage of future opportunities in creating risk assets, except deposit growth improves significantly in 2015.

Final Dividend of N1.50; Dividend Yield: 6.8%
The Board of Directors has proposed a final dividend per share of N1.50, representing a dividend yield of 6.8% at a market price of N22.03 (05/03/2015). This is in addition to the N0.25 interim dividend per share proposed and approved in H1:2014, cumulating to N1.75 per share for FY:2014, a 2.9% increase over N1.70 paid in FY:2013. The closure of its register has been fixed for March 17, 2015 while payment date is scheduled for March 31, 2015.

Rating: Upgrade from HOLD to BUY
Based on the FY:2014 results, GTBank has a trailing EPS of N3.35 (2013: N3.06), and currently trading at a trailing P/E and P/BV of 6.6x and 1.7x (higher than industry average P/E of 5.2x and P/BV of 0.9x) respectively. Subsequently, the stock continues to trade at a premium to its peers based on relative valuation. This is obviously attributable to the Bank’s unwavering determination for efficiency and profitability as evidenced in its key profitability metrics. The robust technology platform has continued to drive profitability of the Bank.  That said, as a result of the significant decline in the share price relative to our 12-month target price of N29.77, we have upgraded our rating on the counter to BUY from HOLD. Consequently, the Bank presents a 35.1% upside to the N22.03 market price as at 05/03/2015.

Source: Afrinvest Research, Nigeria

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