GTB Shares Rated Buy Despite Worsen Credit Condition of Obligors

GTB Shares Rated Buy Despite Worsen Credit Condition of Obligors

Despite reported decline in earnings amidst COVID-19 induced economic lockdown, Meristem Securities Limited said Guaranty Trust Bank is still in shape.

Specifically, a slew of analysts who are downbeat cited that credit condition of the lender’s obligors’ raise its impairment charge on credit losses in the first half.

This douse earnings performance in the first half as profit for the period nosedived more than 5% when compare with equivalent period in 2019.

In its first half 2020 financial statement, lender’s gross earnings receded on the back of reduced operating income.

The bank’s profit dropped due to some misses reported in some income generating line items, impairment charge on credit losses booked jumped.


For the year, analysts at Meristem Securities Limited estimated a soft profitability growth of 1.25% year on year.

Review of the lender’s report indicates that lender’s gross earnings was pressured by a mix of adverse regulatory conditions whcih was further exacerbated by the COVID-19 pandemic.

Meristem Securities said worst hit was fee-based income (net) which declined by 51.81% year year on year to NGN22.29 billion, despite significant volume growth across the bank’s digital and USSD banking platforms.

Analysts explained that the cap on credit related fee and revised ebanking charges were jointly responsible for the depressed fee-based income performance.

The impacts was significant for GTBank as a leading retail bank in Nigeria with strong customers’ base using its various channels.

In the period, interest income growth also moderated to 3.17% from  3.43% in Q1:2020; owing to a decline in asset yield to 11.86%.

Nevertheless, analysts said the 6.51% year to date growth interest-earning assets, is promising considering interest rates are expected to remain low in the near term.

As observed among peer banks, Meristem explained that trading and FX gains remained crucial to overall gross earnings which grew by 1.47% year on year to NGN225.14 billion.

Meristem quoted that the management has guided that the bank will focus on growing quality risk assets, and leveraging its payments capabilities to grow core earnings in the second half of the year.GTB Shares Rated Buy Despite Worsen Credit Condition of Obligors

“The bank’s performance was well within our expectations and we do not envisage any additional risks to gross earnings performance.

“Although the current recovery mode of the economy is consistent with Management’s guidance, we maintain our muted outlook for gross earnings in 2020FY as downside risks (lower interest rates and FX gains) nil out upside risks (volume growth)”, analysts at Meristem explained.

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Bottom Line and the Cost of Asset Growth:

GTB’s net interest margin improved to 9.74% in the first half of 2020 compare to 9.55% in the comparabel period in 2019 after flattening in Q1:2020.

Meristem said this was due to sustained decline in cost of funds to 1.51%, which offset the decline in asset yield.

Profit before tax however declined by 5.25% year on year to NGN94.27 billion due to higher impairment charges necessitated by weakened credit conditions of obligors.

Meristem said this is however expected to improve in the second half of 2020 as result of loan book restructuring and pick-up of economic activities.

Meanwhile, regulatory charges (AMCON and NDIC) and depreciation were also major pressure points owing to the bank’s rapid growth in total assets.

Thus, analysts explained that cost efficiency did not improve as cost-to-income ratio (CIR) stayed above management guidance 43.16%.

GTBank had guided 40% for the period.

“We expect costs to trend lower in H2:2020 as regulatory costs and COVID-19 related donations will not recur.

“As we do not foresee any additional risks to our earlier forecast, we maintain our projection for bottom line growth in 2020 at 1.25% year on year”, Meristem estimated.

Meristem however recognised that healthy macro-prudential position favors lender’s loan growth.

In the first half of 2020, loans-to-Deposit ratio remained below regulatory threshold at 56.82% as deposits grew faster than loans year to date.

For consecutive period, the Central Bank of Nigeria debited GTBank for failure to meet loans as proportion of deposits benchmark.

The management has however indicated that it is not keen on further deposits growth especially as the bank has surpassed its 2020 target deposit growth.

“Thus, we expect the focus in the second half of 2020 to be on deployment of deposits to risk assets”, Meristem stated.

Analysts explained that the bank’s strong capital adequacy (22.90%) supports further loan growth even as the outlook for asset quality (with NPL currently at 6.80%) is positive.

Furthermore, Meristem reckoned that GTB has largely been unscathed by the higher reserves policy due to its robust funding base and relatively efficient use of its assets.

“In view of the planned conversion to a Holding Company with a more diversified income base by Q1:2021, GUARANTY’s outlook is promising.

“Although we maintain our 2020 EPS forecast as NGN6.77, we revise our target P/E to 3.95x from 3.76x to reflect the bank’s positive outlook”, analysts at Meristem stated.

Analysts advised investors to buy lender’s shares as the investment firm sets target price of NGN26.74, with an upside potential of 10.04%.

GTB Shares Rated Buy Despite Worsen Credit Condition of Obligors

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