·         Net interest income of N63.93billion, up 2.91%q/q , 9.42%y/y         

·         Non-interest income of 52.76billion, up 74.15%q/q, 41.63%y/y.

·         Profit before tax of N70.74billion, up 22.74%q/q, 14.01% y/y.

·         Profit after tax of N59.16billion, up 23.21%y/y, 16.29%y/y.

FX Revaluation Gain Offsets the jump in Credit Losses

Recently, Guaranty Trust bank released its Q4 2020 result which showed a 22.74%q/q increase in PBT. This was driven by the 74.15%q/q jump in Non-interest Income and 2.91%q/q rise in Net Interest Income (NII) which offset the increase in loan impairment to N9.43billion from N3.38billion recorded in Q3 2020. We believe the rise in Net Interest Income may not be unconnected to the increase in the bank’s loan book as Net Interest margin remains weak, while the increase in Non-interest Income was due to the FX revaluation gain of N35.02billlion in Q4 2020 from a revaluation loss of N281million recorded in Q3 2020. Similarly, the bank recorded 36.22%q/q increase in net fees and commission as the bank continued to see higher transaction volume on its online platform. We believe the increase in loan impairment may not be unconnected to the country’s weak macroeconomic condition. We highlight net loan grew by 10.70%y/y at the end of FY 2020 from 4.46%YTD at end of Q3 2020. Net Interest Margin (NIM) stood at 9.26% at the end of FY 2020 compared to 9.48% at the end of 9M 2020 and 9.28% in FY 2019. We further highlight that the bank’s NIM was better than 7.90% and 5.40% for Zenith bank and UBA respectively in the same period. 

Decent NII Complements Strong FX Revaluation Gain

On a y/y basis, Net Interest Income and Non-interest income were up by 9.42% and 163.05% to N63.93billion and N52.76billion. This increase in Non-interest Income was driven by the jump in FX revaluation gain of N35.02billion from N9.21billion in Q4 2020 while the increase in NII was due to the increase in the bank’s loan book. Resultantly, the bank’s Profit Before Provisions and OPEX improved by 20.32% y/y to N115.13billion. Despite 11.42%y/y increase in OPEX and the jump in loan impairment to N9.43billion from N2.26billion, PBT rose by 14.01%y/y to N70.74billion in Q4 2020 on the back of strong NII and Non-interest income recorded in Q4 2020. 

Decent FY result

For FY performance, PBT rose by 2.76% due to the 9.64% rise in NII and 8.90% improvement in Non-Interest Income which offset the 10.22% increase in OPEX and a jump in loan impairment to N19.57billion in 2020 from N4.91billion in 2019.

As a result of the 10.42% increase in OPEX, cost to income ratio (CIR) increased to 38.24% from 36.11% in FY 2020. Nonetheless, the bank was able to surpass its FY 2020 guidance of 40% for cost to income ratio. In the same vein, the bank’s Cost to income ratio is well below peers. The bank’s cost of risk rose to 1.18% from 0.34% in FY 2019 due to the jump in credit losses.

The bank’s NPL ratio fell to 6.39% from 6.53% in FY 2019 as a result of the growth in the bank’s loan book (Gross loan up 11.00%y/y in 2020). This is well above the bank’s NPL guidance of less than 5% in 2020.

Outlook

As most banks have already applied for loan restructuring with the CBN, we expect the effect of the current pandemic on asset quality to be managed through this process. In the same vein, with the gradual improvement economic activities, we expect overall performance of assets to improve. Nonetheless, we are still uncertain of about quality of assets after the current loan restructuring programme which affected bulk of public sector loan (though just 6% of the loan book) according to the management. We still believe the bank may focus on its risk management and cost containment strategy in 2021. Nonetheless, we expect the bank to meet its loan growth target of 10% for 2021 while its LDR remains below CBN’s guidance of 65% as the bank’s 2021 LDR target remains at 50%.

With the recent increase in interest rates across different markets, we expect the bank’s Net Interest Margin to improve in 2021. Similarly, the bank’s CAR of 21.89%, though 62bps lower than 2019 level, is well above regulatory requirement of 15%. As such, the bank is still on a strong footing to weather the current storm. In the same vein, with the bank’s plan on Hold Co. structure, we expect this to be positive for its shareholders in the long run as the bank diversifies its business into non-bank services and increases its exposure to other African countries.

While we have seen some depreciation in Naira against USD at the IEFX window, we do not see the same size of devaluation in 2021. As such, we do not expect the bank to record a similar income from FX revaluation gain (N56billion in 2020 vs N17billion in 2019) in 2021. Nonetheless, according to the management, the bank expects a potential FX earning from its swap (Swap value of US$613million) revaluation which is currently carried at around N364/USD. Overall, we believe Guaranty Trust bank is one of the quality names in the sector which should thrive as the bank remains resilient (efficiency and strong capital base) in the face of weak macroeconomic environment.

Source: Company financials, Investment One Financial Services Research

Source: Company financials, Investment One Financial Services Research