October 27, 2021/Cordros Report
GTCO released its nine-month interim financial reports after the close of business yesterday. The result revealed that the HoldCo’s earnings growth remained in the negative territory mainly due to its deteriorating income from investment securities. This significantly lower funded income performance outweighed the funding cost reductions and ultimately pressured bottom-line performance. On the other hand, the non-funded income segment continued to record impressive growth. All in, the HoldCo recorded a 9.6% y/y decline in EPS for the period under review (9M-21: NGN4.54 vs 9M-20: NGN5.02).
Interest income declined by 14.5% y/y to NGN195.04 billion due to lower gains from investment securities (-41.4% y/y to NGN49.91 billion) and cash balances with banks (-32.3% y/y to NGN3.86 billion). Elsewhere, we like that income from loans and advances to customers (+2.9% y/y to NGN141.25 billion) out-turned the negative performance recorded in the preceding quarter (-1.6% y/y), following improvements in risk asset creation (loan to customers growth YTD: +4.5% to NGN1.74 trillion vs 6M-21: -1.8% to NGN1.63 trillion).
Similarly, interest expense declined by 16.6% y/y to NGN32.09 billion on the back of lower fees expensed on customer deposits (-13.5% y/y to NGN28.79 billion) and borrowings (-56.2% y/y to NGN1.86 billion). Although on a quarter-on-quarter basis, interest expenses increased by 17.0%, likely due to further deterioration in the company’s funding mix (CASA as at 9M-21: 85.1% vs 2020FY: 88.9%) given increased higher-cost (term) deposits. Following the lower gains from funded income that outstripped the cost savings, the HoldCo recorded a 14.1% y/y decline in net interest income. However, the lower charges for credit impairments (-40.9% y/y) moderated the extent of decrease – net Interest income ex LLE eventually settled 12.6% y/y lower at NGN156.95 billion.
Like many banks, GTCO maintained the momentum of increasing non-interest income (+18.5% y/y to NGN118.70 billion) during the period. Specifically, net fees and commission income (+58.4% y/y to NGN51.83 billion), gains from FX trading (+23.0% y/y to NGN14.88 billion) and FX discounts & recoverables were the drivers of the growth recorded. These offset the lower income from (1) trading investment securities (-47.8% y/y to NGN3.60 billion), following the mark-to-market losses on FI instruments as a result of the higher yield environment and (2) FX revaluation gains (-28.4% y/y to NGN15.48 billion).
The HoldCo also reported higher operating expenses (+10.1% y/y to NGN123.74 billion) following the increases in AMCON levy (+27.3% y/y to NGN21.89 billion), deposit insurance premium (+7.1% y/y to NGN8.87 billion) and a significant spike in administrative expenses (+131.7% y/y to NGN7.14 billion). Consequent to the OPEX growth and operating income decline, the cost-to-income ratio (ex-LLE) settled at 44.9% (9M-20: 40.2%), which indicates the bank’s efficiency is still tracking below its historical levels (5-year average to 2020FY: 37.3%). Accordingly, the HoldCo’s profit after tax declined relative to the prior year, settling 9.1% y/y lower at NGN129.40 billion.
Comment: The HoldCo’s performance largely mirrors the pressured macroeconomic environment where businesses have strived to remain resilient. Particularly, funded income came under pressure, and we should get further clarity on drivers of income from investment securities during the conference call. For the rest of the year, we still envisage pressure on the interest income line. However, we expect the consistent growth recorded in non-funded income to persist and improve the overall earnings outlook. Our estimates are under review.
