GTBank Stock Rated Overweight After Earnings Surprise

GTBank Stock Rated Overweight After Earnings Surprise

Guaranty Trust Bank (GTBank) stock has been rated as overweight after earnings beat amidst pandemic-induced economic stress in financial year 2020.

In an equity report, by overweight rating, analysts at Asset & Resource Management (ARM) Securities limited guide investors that the stocks has potential to outperform the market in the future.

“Accumulate security to an extent moderated by cognizance of its benchmark weight”, analysts explained.

GTBank recently beat analysts to earnings surprise that cross N201 billion despite disruption in 2020. At N31 per share, investors valued Ticker: GUARANTY at N912.366 billion on 29.431 billion shares outstanding.

Though, there is an indication of asset quality pressure which is expected to probably exacerbate following withdrawal of the apex bank loans restructuring forbearance.

In the banking sector, GTBank exposure to oil and gas clients is heavy but things appear to begin to falling in place as oil recovery has been fast and rapid.

But analysts’ consensus remain that GTBank is yardstick for measuring peers performance following history of strong performance.

A slew of analysts also considered as the bank as industry’s cost leader due to size of cheap customers’ deposits.

GTBank has always recorded lowest cost of funds compare with peers and strong earnings due to strong footprint in the retail segment.

Analysts think GTBank stock will perform very well in the future and they are actually asking investors to ramp up the share in the market.

After earnings beat in 2020, the Board of Directors has proposed to pay final dividend of N2.70 per ordinary shares rank for dividend.

Lower funding cost propels higher earnings

In its audited result for 2020, GTBank profit before tax and profit after tax expanded by 2.8% and 2.3% year on year respectively.

ARM Securities said key driver for the growth in earnings were lower funding cost and slight expansion in interest income.

Funding cost actually dropped 27.4% while interest income expanded by 1.5%, thus lifted the bank earnings accordingly.

In addition, there was 8.9% increase in non-interest revenue which analysts think provided support to growth in earnings.

ARM Securities said lender’s profit after tax of N201.4 billion came in slightly lower than its estimate of N207.4 billion, representing a 3% deviation from expectation.

However, analysts think the deviation largely mirrored a higher-than-expected outturn in operating expenses.

Hence, GTB declared a final dividend of N2.70/ share as against final dividend of N2.80/share, which translate to a dividend yield of approximately 9.1% based on reference price.

This brings the total dividend for the financial year to N3.00/share. Analysts explained that lender’s funding cost was lower by 27.4% with weighted average cost of fund contracting by 103 basis points.

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The decline in funding cost largely reflected lower interest expense on customer deposits which dropped 28%, borrowed funds declined 55% as well as improved current to savings accounts (CASA) mix.

Specifically, lender’s current to savings accounts ratio rose to 89% from 85% in 2019.

Meanwhile, interest income rose by 1.5% as GTBank grew its loan book by 2.5% to N1.66 trillion year on year.

However, analysts at ARM Securities noted that lender’s average yield on assets was down by 130bps year on year to 8.9%.

Overall, net interest income rose by 9.6%, while its related margin contracted by 5bps reflecting a faster decline in asset yield.

Further down the line, analysts noted that GTBank recorded a growth of 8.9% year on year in non-interest revenue against the backdrop of foreign exchange revaluation gain and trading income.

Foreign exchange increased 232% due to strong net dollar position and trading income expanded 17% to support the result.

The bank’s cost of risk expanded by 7bps year on year to 1.0% as GTB reported loan loss provisioning of N16.4 billion – a whopping +240.5% increase from 2019.

On other fronts, analysts added that cost to income ratio expanded by 104 basis points over 2020 to 36.7% as against 35.6% in 2019 following a faster growth in operating expenses, rising +12.6% relative to 9.4% increase in operating income.

Streamlining to the quarterly numbers, GTB reported a better performance compared with the financial year trend.

Precisely, pre and post-tax profit printed higher by 24.8% quarter on quarter and 25.7% quarter on quarter respectively.

ARM Securities consider this as a reflective of improved funding cost and sturdy expansion in non-interest revenue (NIR).

Some 143% quarter on quarter drop on interest expenses paid on deposit from banks and 34% dropped on interest paid to customers lower the bank funding cost.

Elsewhere, higher FX revaluation gain of N35 billion in Q4-2020 as against trading loss of N280 million in Q3-2020 and 36% upsurge in net fee income -a fallout of higher credit related fees (+8% QoQ), transfer related charges (+223% QoQ), and E-business income (+6% QoQ) – supported total NIR.

On margins, net interest margin contracted by 29 bps QoQ following a faster decline in asset yield, dropping by 48 bps QoQ), relative to weighted funding cost (-22bps QoQ).

ARM Securities said the bank’s interest income over the quarter was pressured, declining by 2.7% QoQ, due to the lower interest rate environment.

“This mirrored lower interest earnings on investment securities by 4.2% QoQ”, analysts added.

The stock currently trades at a current P/B of 1.18x which is at a premium its one-year average of 1.08x and a discount to its five-year historical average of 1.56x.

“Our last communicated fair value estimate on GUARANTY is N35.16 which translates to an OVERWEIGHT rating on the stock”, ARM Securities explained.

The bank’s operating expenses went up 12.6% year on year and surged 20.4% in the fourth quarter of 2020 above figure reported in the third quarter.

CSL Stockbrokers Limited explained that the year on year growth coupled with a moderate 10.2% growth in total operating income led to a marginal deterioration in the bank’s cost to income ratio ex-provisions to 36.4% in 2020 compared with 35.6% in 2019.

Analysts thus noted that capital adequacy ratio of 21.9% 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.”, CSL Stockbrokers said

Amidst rising asset quality challenge, analysts at CSL Stockbrokers said with NPL ratio of 6.4%, they remain comfortable with the bank’s asset quality.

“We have a Buy recommendation on Guaranty Trust Bank with a target price of N47.74 per share” it added.

GTBank Stock Rated Overweight After Earnings Surprise