Analysis: “Strong Buy” Recommended After GTB’s Record Breaking Profit
GTB released its 2016 FY results showing profits rose 33% to N132 billion. Here is a cursory analysis of the result.
- Guaranty Trust Bank Plc (GTB) released its FY 16 audited results announcing a 33% YoY (9M 16: +60% YoY) expansion in EPS to N4.49 (2016E: N4.88). In addition, the bank declared a final dividend of N1.75 which brings total payout to N2.00 – 7kobo ahead of our N1.96 call. The final dividend translates to a dividend yield of 6.8% on current pricing.
- In terms of the results, as with Zenith and Access to have reported thus far, FX translation gains provided a strong pillar of support to GTB’s FY earnings on account of its net long dollar position on its balance sheet. Please find below our key highlights from the results released yesterday.
Negative e-business income takes shine of NIR in Q4 16:
- After a brisk pace over 9M 16 (+60% YoY), earnings slowed over Q4 16 after GTB booked negative e-business income of N10.9 billion in Q4 16 which largely accounted for a steep drop in NIR over Q4 16 (-92% QoQ). The development, which suggests over-accrual in prior periods, dragged fee income 93% lower QoQ and offset robust other income. We will be seeking clarity from management regarding the development on fees.
- That said, over FY 16, sizable FX revaluation gains (N87 billion) stemming from GTB’s net long FCY position on the balance sheet helped drive NIR higher (+114% YoY). Excluding the strong translation gains, EPS would have been 36% lower YoY.
Elevated interest rate environment swings N1M higher:
- As in Q3 16, interest income tracked higher, printing at a record quarterly level of N82billion for Q4 16 (+12% QoQ) driven by higher yields on investment securities which drove overall asset yields 200bps higher QoQ. On the funding side, despite the tight rate environment, GTB reported a 3% QoQ cutback in interest expense with annualized WACF 10bps lower QoQ at 2.9%. The lower funding costs stemmed from better deposit mix as GTB shed term funding (-18% QoQ) with CASA share of deposits rising 3pps to 79%. Over 2016, net interest income was up 22% YoY as GTB’s liquid balance sheet (liquidity ratio: 43%) helped it capture higher rates on government securities.
Greater collective provisions drive higher loan loss charge:
- In line with weak macroeconomic environment, GTB’s non-performing loans (NPL) ratio rose 45bps over FY 16 to 3.66% with impairment charges up over 600% YoY to N65.3 billion. The jump in loan loss charges reflected higher collective provisions which accounted for 78% of total provisions as the strong FX induced earnings expansion provided GTB leg room to adopt a more conservative stance over loan quality, in our views. Consequently, coverage ratios (ex-regulatory risk reserves) printed at 135% – highest across our sector universe implying enough cover for NPL book.
- Overall, GTB’s ROAE rose 200bps YoY to 26%, despite the pressures in the macroeconomic landscape in 2016, on account of favourable balance sheet positioning ahead of the 53% NGN depreciation in 2016. The FX induced gains to earnings helped drive Capital Adequacy Ratio (CAR) well clear of regulatory thresholds of 16% to 19.8% (+160bps YoY).
- GTB currently trades at a current P/E and P/B of 5.7x and 1.5x which is at a premium to peers at 3.9x and 0.4x respectively largely reflecting its best-in-class ROAE to the rest of the sector. We have a STRONG BUY rating on the stock with FVE at N31.66.
This article was culled from ARM Research. Subscribe to ARM Research by visiting their website.