Earnings Pressured by Lower Interest Income

Guaranty Trust Bank (GUARANTY) released its third-quarter result for 2019 in which it reported a slump in gross earnings, and marginal growth in profit. Consistent with the theme for much of the year, interest income remained a drag on revenue and earnings, causing a 3.33% drop in gross earnings.

The dip in Interest income (-5.62%) was caused by lower income from loans (-6.27%) and investment securities (-8.66%). Non-interest income line fared a little better, advancing by 2.13% YoY, although compared with Q3 last year, non-interest income in the third quarter fell by 17.17%.

The bank benefited from strong growth in the fees and commission line (+19.90%), along with higher recoveries (+87.13%) and discount and recoverables (+117.95%), which offset the impact of lower FX revaluation gains (-69.64%) and FX trading income (-76.29%). In the last quarter of the year, we see some room for recovery on the interest income line due to the appreciable growth observed in the bank’s customer loan portfolio and a lower earnings base from the corresponding period of last year.

Impressive Cost Control Culture Maintained

GUARANTY impressed yet again with its cost efficiency across all cost centers, posting industry-leading figures. Interest expense declined by 23.40%, largely due to lower interest expense on customer deposits (-20.45%) and an absence of debt securities issued. Thus, the bank’s net interest margin expanded to 9.43% (vs 9.20% in 9M:2018) as net interest income advanced by 1.35%.

Cost to income ratio declined further to 36.85% (vs 38.27% in 9M:2018), as the bank maintained its tight leash on operating expenses, which fell by 2.19%. With cost firmly in check, the bank was able to record growth in PBT (+3.90%) and PAT (+3.35%).

Customer Loans Climb as NPLs fall

The bank’s asset base expanded by 7.06% to NGN3.52trn, although slightly lower than the previous quarter. There was an appreciable growth in the bank’s loan book during the third quarter, as customer loans advanced by 9.44% to NGN1.38trn. Customer deposits advanced by 5.13% to NGN2.39trn, although on a quarterly basis, deposits dipped by 1.13% from the last quarter.

Thus, the bank’s Loan to Deposit ratio improved to 53.99%, from 49.94% in H1:2019 and 53.55% in 2018FY. For its Nigerian subsidiary, the unweighted Loan to Deposit ratio improved to 60.68%, from 57.24% in 2018FY, and evidence of the bank’s effort towards compliance with the new minimum LDR ratio of 65%.

The growth recorded in the bank’s credit portfolio in the third quarter puts it in a good position to meet CBN’s new LDR limit before the deadline, should the momentum by sustained in the fourth quarter. However, we opine that the bank would need to maintain its strong credit risk management policy to prevent an uptick in NPLs.

We are encouraged by the decline in the bank’s stock of non-performing loans (-18.12%) to NGN81.41bn, despite the growth in its loan portfolio. Thus, the bank’s NPL ratio fell
to 5.61% (vs 7.30% in 2018FY), with cost of risk also declining to 0.20% (vs 0.34% in 9M:2018), evidence of the bank’s impressive credit underwriting policies.

In addition, the bank remains in a good capital adequacy position, with a CAR of 23.56%. Its Liquidity ratio however lower at 36.80% (vs 41.44% in 2018FY).


The company’s performance has largely been in line with our expectations. However, we raise our 2019 target EPS slightly to NGN6.81 (previously NGN6.74), due to our expectations for a recovery in interest income which should trickle down to the bottom line, while we maintain our Target P/E of 5.20x. This brings our Target price slightly higher to NGN35.39.

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