Guaranty Trust Bank Plc – Management expects higher earnings in 2017

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March 27, 2017/CardinalStone Research

Guaranty

Segun Agbaje, Managing Director/CEO, Guaranty Trust bank Plc
Segun Agbaje, Managing Director/CEO, Guaranty Trust bank Plc

Trust Bank of Nigeria Plc held its earnings conference call to explain its FY’16 results. We retain our target price (TP) of N32.68 and maintain our BUY rating on the counter. Kindly see below the key points from the conference call.

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Impairments charges to crash in 2017

Management expects impairments provisions in 2017 to declinesignificantly. Hence, it is projecting a cost of risk of 1%-2% (N15.9 billion –N31.8 billion) in FY’17 compared to 4.3% (N65.3 billion) in FY’16.

However, management anticipates that non-performing loans (NPLs) will rise due to current economic pressures. Whilst the decline in provisions and a rise in NPLs appears counterintuitive, management explained that it expects to roll back some of the aggressive provisions made in 2016 where it provided to the tune ofN50.8 billion for its trade finance loans.

The performance of most of these trade loans has significantly improved largely due to the increased FX liquidity from the recent CBN interventions.

Management therefore expects to reverse some of these excess provisions and is consequently guiding towards a lower cost of risk and a coverage ratio of 100% in FY’17 (FY’16: 222%).

Management expects higher earnings in 2017

Despite the significant one-off buffer from FX revaluation gains in 2016, management expects profit before tax to rise toN168 billion in 2017 compared toN165 billion in FY’16.

It further clarified that its earnings projections was not premised on expectations of another round of devaluation but rather on revenue expectations from core banking operation (gains from currency devaluation in 2016 accounted for 21% –N87.3 billion- of gross earnings).

The lender expects its earnings mix in 2017 to return to pre-devaluation levels of 76% interest income and 24% non-interest income.

Management expects income from its fixed income portfolio to grow significantly enough to cover the gap that will be created by the absence of strong revaluation gains in 2017.

To hit this target, interest income will have to rise by at least 33% toN349.8 billion in FY’17 fromN262.5 billion in FY’16.

While we think this interest income target is slightly bullish, we believe the expected lower cost of risk due to impairment write-backs may support bottom-line and make its profit  target ofN168 billion feasible.

Short term business outlook – Q1’17

With the yield on the bank’s fixed income portfolio north of 20%, we expect its contribution to interest income to continue to support earnings in 2017.

We expect a growth of 30% and 34.7% in gross earnings (N97.5 billion) and Profit after tax (N34.7 billion)in Q1’17 respectively.

We expect earnings growth to be driven largely by strong interest income growth (+20% YoY) as well as the expected moderation in impairment charges (-39% QoQ).

 

On the call, management mentioned that its long dollar positionis about $860 million; this means a 10% to 20% naira devaluation will result  in revaluation gains of betweenN27 billion andN54 billion.

That said, in the event of a slight naira devaluation, Guaranty may significantly outperform its projection just as it did in 2016. We expect real loan growth to be relatively flat and any materialdeviation to be as a result of further devaluation in Naira.

Valuation

We remain bullish and confident in management abilities to meet and even outperform its current 2017 guidance. Hence, we have retained our target price ofN32.68 on Guaranty; this represents 22.7% upside to current price ofN26.63. Guaranty currently trades at P/B of 1.6x which is at a premium to peer average of 0.7x.