WSTC upgrades GTBank to BUY rating on improved expected total return
Guaranty Trust Bank grew earnings by 2% year on year in the first quarter of 2020, but analysts said that was too close to the edge.
Meanwhile, WSTC Securities limited has advised its customers to buy the lender’s stock as it upgrade its target price.
In its equity research report, WSTC Securities limited upgraded its rating to a buy after it considered upward adjustment to fair value of the stock.
GTBank share was lifted to a fair value of ₦22.53 compare with ₦16.03 it had initially estimated.
The upgrade was driven, according to the firm, by lower estimated equity risk premium of 16% compare to initial position of 19%.
“At the current market price of ₦21.10, the stock offers a price return of 8% and a dividend yield of 13%.
“Therefore, given an expected total return of 21%, we upgrade our rating to a BUY”, analysts stated.
Traded at ₦21.90 on Friday, GTBank market capitalisation settled at ₦646.014 billion on 29,431, 179,224 shares outstanding.
Review of the Q1 result
In Q1:2020, the bank reported a 2% year-on-year growth in gross earnings, coming from ₦110.33 billion in Q1:2019 to ₦112.87 billion.
Analysts at WSTC Securities Limited in a note stated that within this gross earnings, interest income grew by 3%, from ₦74.48 billion in Q1:2019 to ₦77.04 billion in Q1:2020.
However, non-interest income remained flat at ₦35.83 billion in Q1:2020 as against ₦35.84 billion in the comparable period.
Analysts at Vetiva had expected growth in non-interest income to be stifled by the Central Bank of Nigeria’s regulations.
In the period, lender’s operating income recorded a 6% growth, from ₦92.86 billion in Q1:2019 to ₦97.98 billion.
At a higher rate, operating expenses grew by 11%, from ₦92.86 billion in Q1:2019 to ₦97.98 billion.
This resulted to pretax profit growth of 2%, coming from ₦56.98 billion in Q1:2019 to ₦58.20 billion in Q1:2020.
Maintaining similar trajectory, profit after tax increased by about 2%, from ₦49.30 billion in Q1:2019 to ₦50.07 billion in Q1:2020.
WSTC Securities Limited stated that the lender’s solid performance was maintained on interest income lines.
Due Loan-to-Deposit Ratio (LDR) policy directive of the CBN, combined with the sustained lower yield environment in Q1:2020, the Group expanded its loan book.
This was reflected in the 23% growth in loan and advances to customers, from an average of ₦1.27 trillion in Q1:2019 to an average of ₦1.56 trillion in Q1:2020.
Analysts believed that the double-digit growth in loan book spurred the 6% increase in interest income on loans and advances to customer, from ₦43.74 billion in Q1:2019 to ₦46.41 billion in Q1:2020.
However, asset yield earned on loans and advances to customers declined by 188 basis points year on year, from 13.77% to 11.89%.
As mentioned above, the lower yield environment resulted in a price war in the industry, thus prompting a repricing of risk assets in the markets.
Meanwhile, interest income earned on cash and cash equivalents declined by 57% year-on-year, from ₦3.91 billion in Q1:2019 to ₦1.67 billion in Q1:2020.
The decline was driven by lower volume and price of the asset in Q1:2020.
WSTC speculate that the need to put more cash in risk-assets due to the CBN’s LDR policy, and to avoid a CRR debit possibly resulted in the 29% decline in the value of cash and cash equivalents.
In the period, cash and cash equivalent dropped from an average of ₦759.86 billion in Q1:2019 to an average of ₦537.92 billion in Q1:2020.
Furthermore, asset yield on cash and cash equivalents declined by 82 basis points from 2.06% in Q1:2019 to 1.24% in Q1:2020.
Hence, the impact of lower cash and cash equivalents, as well as lower yields in Q1:2020 led to the 57% decline in interest income on cash and cash equivalents.
The 57% decline recorded in interest income on the cash and cash equivalents offset the 6% growth in interest income on loans and advances to customer.
Analysts explained that interest income on investment securities, which contributed 33% to total interest income in Q1:2020, grew by 11% from ₦22.95 billion in Q1:2019 to ₦25.41bn in Q1:2020.
This came despite a 200 basis points decline in asset yield on investment securities from 14.02% in Q1:2019 to 12.48% in Q1:2020.
“We note that the 24% year-on-year growth in the value of investment securities, from ₦654.79bn in Q1:2019 to ₦814.42 billion in Q1:2020, drove the increase in the interest income earned on that line”, WSTC stated.
Essentially, the higher volume made up for the price decline.
WSTC Securities said: “from our analysis, we identified that the overall growth in interest income was supported by the double-digit growth in interest income on investment securities”.
Lower Cost of Funds due from Excess Liquidity:
WSTC stated that interest expense on deposits from customers declined by 21%, from ₦13.30 billion in Q1:2019 to ₦10.54 billion in Q1:2020.
This happened despite a 13% increase in total deposits from customers from an average of ₦2.34trn in Q1:2019 to ₦2.65trn in Q1:2020.
Therefore, cost of funding from customers’ deposits declined by 60 basis points from 2.27% in Q1:2019 to 1.73% in Q1:2020.
Analysts at WSTC attribute the lower cost of funds to the excess liquidity in the system, following series of the CBN’s policies that resulted in limited investment opportunities for local asset managers and corporates.
On the other hand, interest expense on other borrowed funds also declined by 2%, from ₦1.76 billion in Q1:2019 to ₦1.73 billion in Q1:2020.
Meanwhile, other borrowed funds increased by 9% year-on-year, from an average of ₦176.79 billion in Q1:2019 to ₦160.59 billion in Q1:2020.
Overall, the Group’s total cost of funds on interest-bearing liabilities lowered from 2.48% in Q1:2019 to 1.73% in Q1:2020.
Interest-bearing liabilities, however, grew by 13%, from an average of ₦2.62 trillion in Q1:2019 to ₦2.95 trillion in Q1:2020.
Consequent to the cheap funding cost in Q1:2020, net interest income advanced by 10% from ₦58.22 billion to ₦64.28 billion.
Lower Bank Charges Take Its Toll on Non-Interest Income
Fee and commission income declined significantly by 22%, from ₦18.56 billion in Q1:2019 to ₦14.46 billion in Q1:2020.
The lower income earned on the line was mainly driven by a decline in the credit related fees and commission, and corporate finance fee.
Others include account service maintenance charges, e-business income and commission on foreign exchange deals.
The break down shows that credit related fees and commissions dropped by 39% from ₦4.55 billion in Q1:2019 to ₦2.78 billion.
Corporate finance fees went down 59% from ₦2.33 billion in Q1:2019 to ₦944.36 million in Q1:2019.
Also, account service maintenance charges slide by 32% from ₦1.37 billion in Q1:2019 to ₦924.51 million.
Moreover, E-business income slowed down by 22% from ₦3.18 billion in Q1:2019 to ₦2.49 billion.
Then, commission of foreign exchange deals declined 12% from ₦1.98 billion in Q1:2019 to ₦1.73 billion.
Analysts recall that the CBN, in December 2019, slashed the fees and charges on some banking services in a bid to encourage financial inclusion in the economy.
Trading gains, however, rose by 27%, from ₦4.25 billion in Q1:2019 to ₦5.42 billion in Q1:2020 – driven by a 50% spike in foreign exchange gains from ₦2.99 billion to ₦4.49 billion.
Bonds trading gains also grew by 68%, from ₦366.67 million to ₦614.57 million.
However, treasury bills trading gains declined by 65%, from ₦887.61 million in Q1:2019 to ₦308.57 million in Q1:2020.
Nonetheless, the foreign exchange trading gains was enough to make up for the decline in treasury bills trading gains.
Other income also grew by 22%, from ₦13.04 billion in Q1:2019 to ₦15.95 billion.
The growth in other income was spurred by a 220% foreign exchange revaluation gains from ₦2.64 billion in Q1:2019 to ₦8.45 billion in Q1:2020.
We understand that the recent exchange rate devaluation drove the line, analysts said.
The Group, as at FY’19, was about ₦505.15 billion long on USD. In addition, FX discounts and recoverable surged by 310%, from ₦1.14 billion in Q1:2019 to ₦4.69 billion in Q1:2020.
The upsides recorded on ‘other income’ and ‘net trading gains’ offset the decline in ‘fee and commission income’.
Hence, non-interest income remained flat at ₦35.83 billion in Q1:2020 compare to ₦35.84 billion in the comparable period.
Higher Cost-to-Income Ratio Dampens Bottom line Growth
The Group’s cost-to-income ratio increased to 41% in Q1:2020 from 39% in Q1:2019. The higher cost-to-income ratio resulted from the higher increase in operating expenses relative to the increase in operating income.
Operating expense increased by 11% from ₦35.88 billion in Q1:2019 to ₦39.77 billion in Q1:2020.
This was occasioned by an 11% increase in AMCON expenses from ₦7.72 billion to ₦8.59 billion.
Also, with another 5% increase in other operating expenses from ₦31.29 billion to ₦32.92 billion, and a 49% increase in depreciation and amortisation charges from ₦4.59 billion to ₦6.85 billion.
Analysts at WSTC revised EPS estimate slightly downwards from ₦7.25 in 2019 to ₦7.20.
The firm explained that the rationale for the downward revision is on the basis of its expected lower fee and commission income for the year.
“Although we factored the possibility of FX revaluation gains in our estimate, we believe that the slowdown in fee and commission income could dampen the upside.
“We also expect to see increased operating expenses, induced by higher depreciation charge”, WSTC stated.
On interest income, WSTC maintained assumption that a possible decline in economic activities in the subsequent periods of the year, owing to the coronavirus-induced lockdown, could have a bearing on the capacity of some companies to grow output.
Hence, there is the possibility of a slow growth in loan book in the near to midterm, it added.
WSTC upgrades GTBank to BUY rating on improved expected total return