GUARANTY released its H1-20 earnings yesterday evening. The result showed that the bank recorded a relative decline in earnings as a deterioration of its still industry-best efficiency led to a moderate decline in profitability. Also, the bank proposed an interim dividend of NGN0.30/s, which translates to a dividend yield of 1.2%, based on a market price of NGN25.66/s (2nd September 2020).

Interest income grew by 3.2% y/y to NGN153.71 billion, supported by growth in income from loans and advances to customers (+6.2% y/y), and investment securities (+6.9% y/y), both of which masked declines across interest income from cash (-57.4% y/y), loans to financial institutions (-45.3% y/y) and assets pledged as collateral (-14.7% y/y). We note that the strong growth recorded in risk assets (8.2% YTD to NGN1.62 trillion) was likely responsible for the acceleration in interest income from loans to customers.

On the other hand, interest expense pared by 20.0% y/y to NGN26.09 billion, despite an increase in deposits by 18.5% YTD to NGN3.00 trillion, as the bank has seemingly continued to improve its CASA (low-cost deposits: current and savings accounts) mix during the year. Consequent on the strong balance sheet management, net interest income growth was strong, expanding by 9.7% y/y to NGN127.62 billion.

Non-interest income grew moderately during in the period, settling 1.0% higher y/y at NGN72.18 billion, with major lines recording declines save for, gains from FX trading (+43.6% y/y to NGN7.65 billion) and FX revaluation (+723.1% y/y to NGN21.90 billion). While NII grew at a slower pace than might otherwise been expected, given revised charges and weaker transactions flows occasioned by the global pandemic, the positive impact of revaluation gains should lead to a positive year-on-year performance in non-core income. Given the growth in income, and despite the exponentially larger loan loss expenses (+209.7% y/y to NGN6.77 billion), the bank recorded an expansion in operating income of 4.0% y/y.

Operating expenses expanded by 19.2% y/y to NGN83.31 billion, with the most pressure exerted by regulatory charges – AMCON levy (+11.1% y/y to NGN17.20 billion) and NDIC premium (+105.0% y/y to NGN8.26 billion). Consequent on the OPEX growth relative to operating income growth, cost-to-income ratio (ex-LLE) settled higher at 43.2% relative to 40.6% and 37.6% in the prior quarter and the corresponding period of the prior year respectively. Consequently, profitability was weaker, with profit-before-tax settling 5.2% lower year-on-year, while profit-after-tax settled 4.9% lower, given the decline in income tax expense (-7.3% y/y to NGN15.44 billion).

Comment: While the bank’s performance came under pressure as expected, the reason for the relative earnings decline was not expected. We should get more clarity regarding the increases in marketing expenses during the bank’s conference call. From the numbers posted, we have started to see the impact of much-increased risk asset creation, which has also affected LLEs. We expect pressure on that line in 2020FY, even without significant NPLs growth, given regulatory forbearance expected due to the impact of COVID-19 on the economy. Nonetheless, we expect the bank to record a decent performance in the year, supported by non-core earnings (FX revaluation gains). Our estimates are under review.