Guaranty Trust Bank Plc. (12 months ended December 2014)
- Guaranty Trust Bank (GTB) reported results for the 12 months to December 2014 wherein revenues rose 15% YoY to N276.4 billion. PBT was 9% higher YoY (6M: -7%) at N116.4 billion while PAT gained 10% YoY (6M: -10%) to N98.7 billion.
- GTB also announced a final dividend of N1.50 bringing FY payout to N1.75 representing a 55% payout ratio and FY dividend yield of 8%.
NIR spike underpins strong operating performance
- GTB recorded revenues of N78.4 billion for Q4 14 which was 19% higher QoQ and 15% ahead of our estimates. Much of the outperformance came from non-interest revenue (NIR) which rose 49% QoQ (ahead of our estimates by a similar margin) to reach N26 billion for the quarter—an all-time high. Whilst GTB is yet to provide a breakdown, events in the financial system in Q4 14, especially volatility in currency markets, suggest forex income likely played a dominant role in the surge. Extending the positive tone, GTB broke a pattern of stagnant asset growth over the first 9 months of 2014 as asset base jumped 5% QoQ led by an 11% QoQ jump in loan book. This helped Q4 14 interest income rebound by a stronger-than-expected 8% QoQ to N52.5 billion, 3% ahead of our estimates. Highlighting the pricing trade-off that helped drive the growth in earning asset volumes, yield on earning assets dropped 30bps from 9M 14 to 10.2% vs. our 10.1% FY 14 estimate.
- Underpinning the balance sheet expansion, deposits jumped 7% QoQ to N1.65 trillion vs. our N1.635 trillion estimate suggesting a marked flight-to-safety as diverse shocks, including policy twists, sent the financial system on a roller coaster in Q4 14. Accordingly, while the greater funding volumes helped drive interest expense up 4% QoQ to N15.4 billion (11% ahead of estimates) funding costs actually declined 15bps QoQ to 3% as safety, rather than price, focused funds flowed in.
Opex breaks rank but bottom line strength intact
- Largely reflecting strong top-line growth operating profit was up 23% QoQ to N63 billion and the 17% QoQ climb in opex to N26.6 billion did little to dampen the bullish performance. Whilst we had expected quarterly opex to reach a new high (9M average: N22.7 billion), actual numbers came in 10% above expectations and, in line with the pattern from year start, we believe ‘other opex’ remained the driver as the higher regulatory cost environment continued to weigh. Nevertheless, revenue strength meant that cost-to-income ratio dropped 50bps from 9M 14 to 43.4% (FY 14E: 44%).
- Resuming the pattern of positive surprises, provision which stepped down 70% QoQ in Q3 from the Q2 highs came down a further 31% QoQ to N811 million in Q4 14 (FY 14E: N5.3 billion)—a development in stark contrast to the conventional wisdom on expected Q4 14 provisioning outcomes going by the financial turmoil in the quarter, especially when the significance of (oil) reserve based lending as proportion of industry assets is considered in light of crude oil price crash. It would seem that the CBN decision to relax sector-risk based provisioning guidelines in December helped the benign charges, even accounting for GTB’s stellar provisioning record. It will be interesting to see how other banks fare in this regard, and for GTB in particular we will be seeking clarity whether other factors played a role in the minuscule provisions.
- Hinged on strong revenues and lower impairments, PBT was up 31% QoQ to N35.7 billion while PAT was up 41% QoQ to N32 billion with similar considerations putting these numbers respectively 42% and 52% ahead of our estimates. Corresponding FY PBT and PAT margins of 42% and 36% are each 200bps lower YoY, perhaps the only deference to the tough 2014 environment. From 9M 14, PBT margin is 100bps higher while PAT margin is 200bps ahead.
New challenges could constrain FV but recent price pressures should leave sufficient upside
- The commencement of the Treasury Single Account (TSA) in 2015 is likely to be a big challenge for the banks as the loss of cheap deposits constrains revenue (both from asset creation and ‘float’ gains) while also shaping to raise average borrowing costs. We do not think GTB is immune from these challenges and our top-line revisions are likely to be significantly lower. However, the regulator continues to back-pedal on provisioning guidelines in the face of global shocks and has followed up the December 2014 reduction of penalties with indefinite suspension of the sector risk-based provisioning framework. We expect this could help GTB keep provisioning mild, offsetting net impact of top-line revision on fair value estimate. GTB’s current PE and P/B of 7.3x and 1.95x remain at premia to peers’ but a significant step down from prior levels reflecting market-wide price pressures. The latter point suggests upside could remain robust enough despite FV revisions to justify a BUY rating on GTB
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