August 23, 2016/Cordros Research

Guaranty Trust Bank Plc (GUARANTY) released half year result for the period ended 30 June 2016 on Wednesday (August 19, 2016). EPS (earnings per share) for the period increased to N2.74, compared to N1.88 in the previous year while RoAE (Return on Average Equity) surged to 35.76%, from 28.12% in the previous year. The result significantly outperformed both consensus and our estimate. Following revisions to our model on account of the outperformance, we have upgraded our TP to N30.46 but revised out recommendation on the stock to HOLD from BUY previously.

We have raised 2016FY EPS and RoAE forecasts to N4.52 and 28.7% respectively, from N3.67 and 23.5% previously. Net loans and customer deposit growth have also been revised upwards to 17.9% (previous 15%) and 28% (previous 14.2%) respectively on account of the devaluation impact. In addition, we expect margins to improve based on the high yield fixed income environment which should benefit investment securities (interest income on investment securities actually dropped 31.6% y/y in H1’16). Given the magnitude of gains (N61 billion) from forex revaluation in the second quarter, we have revised our non-interest income forecast upwards and adjusted for potential gains in the third quarter due to further depreciation of the currency since H2’16.

Asset quality deteriorated significantly in Q2’16, with NPLs and cost of risk jumping to 4.39% and 2.48% respectively from 3.51% and 0.99% as at Q1’16. Consequently, we have revised NPL ratio to 4.4%, from 4.0% previously. However, a risk to our forecast is the recent CBN directive which grants banks a one-off forbearance to write-off bad loans even if they are fully provided for less than a year (the previous minimum time before a bank could write-off fully provided loans). Thus, we may see another large round of loan loss provisions in Q3’16 while NPLs reduce.