GTBank’s Q1 2020 unaudited numbers showed a 3.4% y/y growth in Interest Income. Interest Expense, on the other hand, declined significantly, down 21.6% y/y mainly due to a significant decline in Interest Expense on Customer Deposits despite the substantial growth in Customer Deposits (up 15% y/y).
We expect declining funding cost to continue to mitigate the declining yield on interest-earning assets. Overall, Net Interest Margin (NIM) remained resilient at 9.89% at par with 9.90% in Q1 2019.
As expected, Net Fee and Commission Income took a hit, down 24.7% y/y due to regulatory cuts to fees and commission income, mainly E-business income such as a 46.15% cut in ATM withdrawal fees to N35 from N65, and a reduction in electronic transfer fees from a minimum of N50 per transfer to N10 for transactions below N5,000, N25 on transactions between N5,001 and N50,000 and N50 on transactions above N50,000.
The revised charges took effect in January, as such E-business Income which had previously been the main driver of Fee and Commission growth declined 21.5% y/y. Credit-related fees and commission also declined significantly, down 38.8%. Other Fee and Commission lines such as corporate finance and account maintenance charges also declined.
Impairment Charge of N1.2billion was up 87.8% y/y, bringing the annualized cost of risk to 0.08%, lower than 0.34% reported for FY 2019. With an NPL ratio of 5.95% and the coverage ratio of 130.48%, we are quite comfortable with the bank’s asset quality. The bank also noted that its upstream Oil and Gas exposure is hedged at US$50 for 24 months.
OPEX was up 10.9% y/y. This, coupled with a moderate 6.1% growth in total operating income led to a deterioration in the bank’s cost to income ratio ex-provisions to 40.1% in Q1 2020 compared with 38.4% in Q1 2019.
Pre-tax profit was up 2.1% y/y while Net Profit was up 1.5% y/y, bringing annualised ROAE to 29.7% compared to 31.2% for FY 2019.
Other Income (Net gains on financial instruments held at FVTPL, Other Income, and Net Impairment on other financial assets) increased 23.6% y/y on the back of significant growth in foreign exchange trading gains and revaluation gains.
GTBank also reported N8.5bn in revaluation gains in March 2020 compared with N2.6bn in March 2019. Excluding revaluation gains for both years, Pre-tax profit would have declined by 8.5%. GTbank has a significant net long FX position and will benefit from any further devaluation.
We have a Buy recommendation on Guaranty Trust Bank and a target price of N51.95/s. The current price of N18.60/s.
Capital adequacy ratio of 23.52% with full IFRS 9 impact is significantly above 15% regulatory minimum. Without significant deterioration in asset quality, which we believe is unlikely in the near term, we believe the bank’s capital position will remain resilient given its net long FX position and expectations of revaluation gains to cushion the effect of devaluation on capital.