Culled—-Proshare

August 31, 2016/FBNQuest Research

Resilience reflected in valuation at current levels
GT Bank shares have performed very strongly year-to-date. They are up 44%, compared with a loss of –4% for the ASI. The justification for this outperformance can be traced to the ability of the bank to weather the current economic storm better than most. The H1 2016 results support this assertion.

In Q2, naira devaluation gains were the single most important driver behind GT Bank’s better-than-expected results. As such, although we have raised our 2016E earnings estimates accordingly, we have made only modest changes to our 2017E estimates.

Although further devaluation since June will likely result in additional fx gains, for now, we expect such gains to only impact 2016 (materially), not 2017, and that these (gains) are likely to overshadow any further asset quality deterioration beyond what we observed in Q2.

To our minds, the market has largely factored such expectations into the share price. Although we have rolled over our valuation to 2017, our decision to increase the risk free rate estimate factored into our valuation by 200bps to 14.5% proves significant, leading to a 4% cut to our price target to N23.0.

While our price target shows -12% downside potential, we believe naira devaluation is likely to provide some support for the shares in the near term, hence our decision to downgrade our recommendation only to Neutral.

Significant earnings growth in Q2
GT Bank’s Q2 2016 PAT of N63bn was up 131% y/y on the back of a PBT result of N61bn (+99% y/y). The single reason for this strong result was FX revaluation gain (in H1 this was a whopping N61bn).

It more than made up for a poor funding income results (net interest income was down -6% y/y) and a marked rise in loan loss provisions (+1,309% y/y) of N34bn. Relative to our estimates, the results were significantly ahead because of the revaluation gain.

PAT was 160% ahead of our forecast while PBT beat by 107%. If we exclude the one-off gain, the PBT came in not too far from our forecast because the underlying non-interest income was slightly ahead of our forecast and compensated for a weaker-than-expected (by 9%) net interest income. Opex was 6% below our forecast.

Where the positive of the FX revaluation gain starts to fade is the provisions line where the N34bn that the bank booked was almost 10x our N3.9bn forecast. In one quarter, GT has booked double the provisions we had been forecasting for the entire year.