Guaranty Trust Holding Company Q2 22 audited results
| Increased taxation weighs on H1 earnings Stock Rating: BUY Price Target: N36.63 Price (03-Sep-2022): N19.90 Potential Upside / Downside: +84.1% Tickers: GTCO NL / GTCO.LG |
| Guaranty Trust Holding Company (GTCO) released its H1 22 audited results before trading hours today (5 September). The group reported 11.0% growth in Pre-tax profits while Net profits declined by 3.0% in the period. For Q2 22 standalone, Pre-tax profits (+24.4% y/y) and Net profits (+0.9% y/y) rose. On the H2 22 EPS of N2.79, the board proposed an interim dividend of N0.30 (flat y/y), in line with our expectations. This implies an interim dividend yield of 1.5% on the stock’s last closing price. On balance, earnings were weighed by increased Tax expenses, following the expiration of the tax exemption period for government securities. When annualised, Net profits were behind our and consensus forecasts for FY 22 by 19.8% and 17.6%, respectively, owing to negative surprises on the Tax expense and Other income lines. Despite the earnings decline, we expect the market’s focus to be on the sustained dividend payout and the still-attractive yield. Hence, we do not foresee an adverse market reaction. |
Loan growth, improvement in loan yield boosts NII
Interest income grew by 16.7% y/y in H1 22 and was primarily supported by a 13.1% y/y (Q2 22: +11.4% y/y) growth in Interest earned on loans to customers. The rise came as the group recorded a 27bps y/y increase in the average yield on customer loans and growth in gross loans (+12.3% y/y; +1.6% y-t-d).
Interest expense rose by 38.4% y/y in H1 22, driven by a 44.6% y/y increase in Interest paid on Customer deposits as the group’s Current and Savings Account (CASA) mix deteriorated to 85.9%, compared with 86.7% in H1 21. Consequently, the group’s cost of funds increased by 20bps y/y to 1.2%. Nonetheless, Net Interest income grew by 12.9% y/y, while the Net Interest Margin (NIM) compressed slightly by 12bps y/y to 5.8%, on our calculations. Increased tax expenses, opex weigh on earnings
Non-interest income grew by a decent but lower-than-expected 6.6% y/y in H1 22. The growth was driven by a 33.4% y/y surge in Trading revenues following a substantial rise in Net FX trading gains. However, Other income faltered, declining by 13.7% y/y following a slump in FX revaluation gains.
Elsewhere, Operating expenses (Opex) grew by 11.3% y/y, mainly on Communications, technological related expenses and administrative expenses (+36.0% y/y) and Occupancy costs (+58.0% y/y). According to the financials, the former is inclusive of the administrative fee due to the group’s Staff Investment Trust (SIT) for the management of the shares held by the scheme while the latter relates to diesel, fuel, and electricity cost as well as ground rates and water cost. As a result, the group’s Cost-to-Income ratio increased to 48.2% (H1 21: 47.7%), reflecting that the bank’s efficiency is still tracking below its historical levels (5-year average: 37.3%).
However, following the larger growth in net revenue than costs, Pre-provision operating profits rose by 9.2% y/y. Further down the P&L, Loan Loss Provisions declined by 25.4% y/y, following an improved outlook for the macroeconomic variables used in the Expected Credit Losses (ECL) model in the period. As a result, the group’s Cost of Risk declined to 0.2% (H1 21: 0.5%). Overall, Pre-Tax profits grew by 11.0%. Notably, the group’s effective tax rate rose to 24.9% (H1 21: 14.7%), following the reduction in Tax-exempt income as a result of the expiration of the tax exemption period for government securities. Consequently, this led to a 3.0% decline in Net profits. Slight deterioration in asset quality
Non-performing loans (NPL) ratio rose to 6.2% in H1 22 (FY 21: 6.0%; H1 21: 6.0%) and remained above the statutory limit of 5.0%. Elsewhere, the group’s total capital adequacy ratio closed at 22.0%, significantly higher than the minimum regulatory requirement of 15.0%.
Conclusion
Net interest income was in line with our expectations. However, profits were lower than our and the market’s expectations following higher-than-expected tax charges and operating expenses. We are worried about the slow growth in the group’s loan book, while concerns remain around the elevated operating expense profile. However, we are encouraged by the fact that the group maintained its dividend payout despite the drop in earnings.
On the positive, as we expected, interest rates have risen significantly in recent weeks. As a result, the benefits of rising asset yields are likely to filter through to funded income and support earnings in Q3. In addition, the stock has declined by 23.5% y-t-d and is trading at a deep discount to its peers and historical valuation. This presents an attractive entry opportunity for investors. Accordingly, we maintain our BUY recommendation on the stock. Read Report . SOURCE: Coronation Asset Management
