GTB: Losing revenue, losing profit

Guaranty Trust Bank’s ability to convert assets into revenue and revenues into profit weakened in the first quarter, as assets grew and revenue dropped. Costs are under control but the revenue weakness affected profit capacity as well. Earnings performance may improve in the subsequent quarters and the bank may still maintain its record of continuing earnings growth at full year, albeit a sustaining slowdown.

The bank posted gross income of N75.39 billion at the end of the first quarter operations, a decline of about 5% year-on-year. The full year outlook indicates gross earnings in the region of N303 billion – a flat closing on the N302 billion figure the bank reported in 2015. This is indicating that earnings growth isn’t likely to be as good as last year when the bank raised gross earnings by 8.4%. That was a slowdown from a growth of close to 15% in the preceding ear.

GTB has maintained a continuing growth in revenue over the years. The ability to sustain stable improvements in both revenue and profit in the difficult operating terrain of last year is quite remarkable. A step up in the earnings growth in the current will have to happen for the bank to maintain the stable growth record in 2016.

Interest income is providing the strength for revenue growth in 2016 as per the first quarter interim report. That was also the position in 2015 when interest income grew by 14.3%, accelerating from 8.2% in 2014. Interest income contributed an increased proportion of revenue in 2015 at 76% compared to 72% in the preceding year. Major drops in income from financial assets trading and other income in the first quarter accounted for the revenue weakness during the period.

We expect that revenue growth would step up for Guaranty Trust Bank in the second quarter, as economic activity picks up generally and budget implementation spurs aggregate expenditure with positive multiplier effects across sectors and industries. The bank’s ability to keep earnings stable looks likely to be tested this year.

In terms of ability to convert revenue into profit, the key determinants are the behaviours of interest expenses, loan loss charges and operating cost. All the three major expense lines showed moderate behaviours in the first quarter but the decline in revenue was the critical factor that hindered profit growth.

The bank ended first quarter trading with a profit decline. Net profit went down by 3.6% to N25.61 billion year-on-year. After tax profit is projected at N101.4 billion for GTB at the end of 2016, an expected marginal increase over the closing figure of N99.44 billion in 2015. The bank grew after tax profit by 5.3% to N99.4 billion in 2015, almost maintaining the growth rate in the preceding year. GTB has maintained a sustaining growth trend in profit for several years albeit a sustaining slowdown. Profit growth may accelerate in the subsequent quarters, as revenue is expected to pick up.

Interest expenses are showing moderating behaviour this year, with a slight decline to N15.04 billion at the end of the first quarter. This is a shift from the pattern of last year when interest cost grew ahead of interest income. While the average cost of funds grew in 2015, a change of direction has been observed at the end of the first quarter. The decline in interest expenses has enhanced net interest income for the bank.

At N69.29 billion, interest expenses rose by 19% for GTB in 2015 and claimed 30.2% of interest income. At the end of the first quarter, the ratio declined to below 27%, confirming a significant cost saving from interest expenses. GTB closed the 2015 operations with a total deposit portfolio in excess of N1.61 trillion, which has risen to over N1.8 trillion at the end of the first quarter in 2016.

Impairment charges for risk assets are also showing a benign behaviour in the current financial year. Compared to an increase of about 75% in 2015, loan loss charges declined slightly year-on-year at the end of the first quarter at N3.38 billion. Impairment charges pose no real concern at 4.5% of gross earnings at the end of the first quarter.

Management applied caution in growing risk assets in 2015 after a major expansion of 27% in the preceding year. Loan portfolio growth was lowered to 7.5% in 2015, which is a right response in a period of rising credit losses. The caution has been maintained so far in 2016 with a slight decline in net credit portfolio from about N1,373 billion at the end of 2015 to N1,363 billion at the end of the first quarter. Overall credit quality remains good with total impaired loans and advances representing 3.2% of the gross portfolio, virtually unchanged from the position in the preceding year.

GTB recorded a sharp slowdown in operating expenses in 2015 with an increase of 2.1%. This has extended further to a slight decline in the first quarter of the current year. At N25.73 billion, total operating cost declined by about 2% year-on-year, which enabled the bank to moderate the impact of revenue decline on profit.

The bank closed first quarter operations with a net profit margin of 34% – one of the highest in the banking industry. Earnings per share amounted to 90 kobo at the end of the first quarter with a full year expectation of N3.50.