PAC Analyst Advised Dividend-seeking Investors to Buy GTB Shares
In spite of 5% dip in earnings, equity research analysts at PanAfrican Capital (PAC) led by Oluwole Adeyeye has rated Guaranty Trust Bank stock a buy amidst optimism on earnings outlook for the year.
Traded at ₦25.35 per share, GTBank’s market capitalisation hits ₦738.722 billion on Friday, after it has been marked down for interim dividend of 30 kobo.
In the first half of 2020, Guaranty Trust Bank showed an improved top-line as gross earnings rose by 1.47% to ₦225.14 billion as against ₦221.87 billion in the first half of 2019.
PAC’s analyst stated that in line with the firm’s forecast, connect the improvement in the top line mainly to interest income, which rose by 3.17% to ₦153.71 billion in H1’20 compare to ₦148.99 billion reported in H1’19, due to higher income from the investment securities and loans & advances.
However, PAC stated that the non-interest income line of the bank suffered a setback as it fell by 1.98% ₦71.43 billion in H1’20 from ₦72.88 billion in H1’19).
PAC ascribed the lower non-interest income in the first half to lower bank charges which resulted to lower fee and commission income.
Impressively, the investment firm explained that the bank benefited from lower yields in the first half of 2020 as cost of funds fell by 149 bps to 1.51% from 3% in H1’19.
Then, this translated to a lower interest expense of ₦26.09 billion in H1’20, compare to ₦32.63 billion in the comparable period in 2019.
Meanwhile, total operating expenses increased by 19.23% to ₦83.31 billion from ₦69.87 billion in H1’19 while loan impairment charge rose significantly by 209.65% to ₦6.77 billion in H1’20 as against ₦2.19 billion in H1’19.
With lower non-interest income, higher operating expenses and higher loan impairment charges, profit before tax fell by 5.25% to ₦109.71 billion in H1’20 from ₦115.79 billion in H1’19.
The audited statement for the first half revealed that lender made a lower tax provision of ₦15.44 billion in H1’20 billion from ₦16.65 billion in H1’19.
Consequently, profit after tax declined by 4.90% to ₦94.27 billion from ₦99.13 billion in H1’19.
Impressively, PAC stated that 12-month trailing EPS improved by 2.03% to ₦6.52, from ₦6.39 recorded in the previous period.
As a result, the bank rewarded the shareholders with interim dividend of ₦0.30 per share in H1’20 (H1’19: ₦0.30).
Based on the recently released figures, the investment firm maintained a BUY rating on the stock at the current price of ₦25.00 as present forward estimate places the company share price at ₦30.06, an upgrade from previous estimate of ₦28.24.
Despite the impact of coronavirus pandemic on transaction volumes and economic and market disruptions coupled with pressure on asset yield and revision to bank charges in the first half of 2020, Guaranty Trust Bank reported impressive top-line.
The gross earnings of the bank increased by 1.47% to ₦225.14 billion in the first half of 2020 from ₦221.87 billion in the first half of 2019, mainly as a result of resilient performance of the interest income line.
The interest income of the bank increased by 3.17% to ₦153.71 billion in the first half of 2020 as against ₦148.99 billion in the first half of 2019.
However, the bank suffered a setback in the non-interest income line as it fell by 1.98% to ₦71.43 billion in H1’20 compare to ₦72.88 billion in H1’19.
“In line with our projection, the reduction in the non-interest line of the bank was mainly attributed to lower bank charges which resulted to depression of fee and commission income during the period”, PAC stated in its equity note.
Meanwhile, lender’s interest income improves by 3.17% due to growth in the average volume of risk assets and fixed income securities.
In line with PAC expectation, analysts stated that Guaranty Trust Bank Plc partially benefited from higher loan-to-deposit in the half year of 2020 as interest income from loans and advances increased by 5.21% to ₦93.74 billion from ₦89.09 billion in H1’19.
In addition, lender also benefited from the long position taken in fixed income securities when yields were high as total interest income from investment securities increased by 8.89% to ₦53.39 billion in H1’20 from ₦49.03 billion in H1’19.
The improvement in interest income from loans & advances and investment securities result to higher total interest income, up 3.17% to ₦153.71 billion from ₦148.99 billion in the comparable period.
Impressively, the audited first half results showed that lender’s interest expenses fell significantly by 20.03% to ₦26.09 billion from ₦32.63 billion reported in the first half of 2019, due to improvement in the cost of funds.
GTBank cost of funds slide to 1.5%, represent 800 basis points decline from 2.3% in the comparable period.
PAC analyst attributed the improvement in the cost of funds to improvement in low-cost deposit, repricing of deposit rates and exiting expensive tenured deposits during the period.
In addition, the bank’s interest expense also gained from improved system liquidity which resulted from the restriction on individuals and non-banking corporates from investing in OMO treasury bills.
Lower bank charges, lockdown of economic activities and restriction of movement in the second quarter impact on total non-interest income.
Lender’s non-interest income dropped by 1.98% to ₦71.43 billion compare with ₦72.88 billion reported in the six-month to June 2019.
The investment firm said the decline in the non-interest income resulted from the significant fall in fee and commission income during the period.
It explained further that the spread of coronavirus in the country in the first half of 2020 impacted on transaction volumes.
This came along the reduction of bank charges by the Central Bank of Nigeria which adversely impacted the fee and commission income in the first half of 2020.
With lockdown of economic activities, restriction of movement and reduced bank charges, fee and commission income fell significantly by 30.04% year on year to ₦24.73 billion from ₦35.35 billion.
However, PAC stated that the setback in the fee and commission income outweighed the benefit derived from the foreign exchange revaluation gain.
For the bank, this translated to depressed non-interest income in the first half of 2020.
During the period, lender’s operating expenses rose significantly by 19.23% to ₦83.31 billion from ₦69.87 billion reported in the first half of 2019.
Analysts said this resulted in cost-to-income ratio of 43.2% during the period compare to 37.6% a year earlier, due to increase regulatory cost (AMCON levy and NDIC), rising inflation rate and increase in level of depreciation charges.
“We expect the bank to work on their cost minimisation strategy going forward as the increase in the operating expenses of the bank is way higher than the inflation figure of 12.56% for the month of June 2020”, PAC analyst said.
The bank’s impairment charges increased significantly by 209.65% to ₦6.77 billion in the first half of 2020 from ₦2.19 billion.
The increase in impairment charge reflected the heightened probability of default due to the impact of COVID 19 on macroeconomic variables which resulted in worsening forward-looking information which primarily drives IFRS 9 impairment numbers.
As a result of higher non-interest income, worsened impairment charges, and higher OPEX, profit before tax fell by 2.25% to ₦109.71 billion from ₦115.79 billion in the comparable period in 2019.
However, the bank made a lower provision of ₦15.44 billion for tax during the period compare to ₦16.65 billion in the first half of 2019.
Despite this, lender’s profit after tax dropped 4.90% to ₦94.27 billion in the period from ₦99.13 billion in H1’19.
PAC said the result makes Guaranty Trust Bank the second best performing listed bank, in terms of profit after tax, in Nigeria in the first half of 2020.
Analysts said lender’s balance sheet remains solid and strong as GTBank rewards shareholders with interim dividends of ₦0.30 per share.
The balance sheet position of Guaranty Trust Bank remains strong and solid in the first half of 2020 as total assets increased by 25.38% year on year to ₦4.51 trillion from ₦3.60 trillion.
PAC said the improved total asset is attributed to higher cash & cash equivalents, improved loans and advances and restricted deposits & other assets.
However, analysts recognised that total liabilities of the bank increased by 26.55% to ₦3.79 trillion in H1’20 from ₦3.00 trillion in H1’19.
This was mainly as a result of higher deposit, derivative financial liabilities and other liabilities during the period.
As well, GTBank net assets increased significantly by 19.56% to ₦720.93 billion in H1’20 from ₦603.01 billion and this resulted in a higher net asset per share of ₦24.50 in H1’20 from ₦20.49 a year ago.
At 22.93%, PAC noted that lender’s capital adequacy ratio and liquidity ratio are well above the regulatory requirement of 16% and 30% respectively.
Capital adequacy ratio closed at 22.93% from 22.51% in the first half of 2019 while liquidity ratio closed at 43.15% from 41.44%.
“With the bank’s performance, we also expect the bank to pay impressive final dividend in the full year of 2020.
“Our valuation puts the target price of the stock at N30.06, representing an increase of 20.26% from the current price of N25”, PanAfrican Capital explained.
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PAC Analyst Advised Dividend-seeking Investors to Buy GTB Shares
