GTB reaps foreign exchange revaluation windfall in Q2

Guaranty Trust Bank ended second quarter operations with a foreign exchange revaluation gain that multiplied its first quarter profit figure more than three times. The bank is in a year in which its ability to keep earnings stable is to be tested and the revaluation gain has come quite timely to the rescue.

With the depreciated value of the naira, the revaluation gain soared a clear 834% year-on-year to stand at N61.25 billion at the end of the second quarter. Revenue growth therefore accelerated from the first quarter performance and the full year outlook for both income and profit has improved significantly for the bank.

The bank succeeded in strengthening the two sides of its operational flow – converting assets into revenue and revenue into profit. Profit margin improved to reinforce its industry leading position against the generally declining trend in the business. Rising credit losses remain a major challenge for the bank but other major costs elements of the bank are under control. The earnings leap in the second quarter has positioned the bank for the strongest earnings growth records since 2012.

The bank posted gross income of N209.87 billion at the end of the second quarter operations, a growth of 37.2% year-on-year. The full year outlook indicates gross earnings in the region of N367 billion – an expected accelerated increase of 21.5% over the N302 billion figure the bank reported in 2015. The bank had raised gross earnings by 8.4% in 2015, which was a slowdown from a growth of close to 15% in the preceding year. The strongest revenue growth in five years can be expected from Guaranty Trust Bank in 2016 based on the current growth rate.

GTB has maintained a continuing growth in revenue over the years. Non-interest income is the revenue driver this year, accounting 47.7% of gross earnings at the end of the second quarter against 25.6% in the same period last year. At N109.78 billion, interest income was down by 3.6% year-on-year at half year notwithstanding a strong growth of close to 14% in net credit volume over the closing figure in 2015.

The slacken performance of interest income shows a loss of the strength in last year’s performance. Interest income had grown by 14.3% in 2015, an accelerated growth from 8.2% in 2014. Interest income contributed an increased proportion of revenue in 2015 at 76% compared to 72% in the preceding year. A major drop in the ratio can be expected for Guaranty Trust Bank at the end of 2016.

Credit quality problem accounts for the weakness in interest income with loan loss charges surging 531% year-on-year to N37.55 billion at half year. This is a surprising upsurge from the first quarter position when loan loss charges declined slightly year-on-year and stood at N3.38 billion at the end of March. The second quarter figure is already more than three times the N12.4 billion impairment charge the bank made in all of 2015. That caused a drop of 44% in net interest income after loan impairment charges.

Apart from impairment charges, the other main two expenditure lines of the bank are under control. At the end of the second quarter, interest expenses declined by 9.2% year-on-year to N30.66 billion against a top growth record of 22.5% in customer deposits over the six months of the year. This is a shift from the pattern of last year when interest cost grew ahead of interest income. The average cost of funds grew in 2015 but there is a change of direction so far this year. The surge in impairment charges more than countered the positive effect of the decline in interest expenses on the income statement.

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 second quarter, the ratio declined to below 28%, confirming some cost savings for the bank from interest expenses. GTB closed the 2015 operations with a total deposit portfolio in excess of N1.61 trillion, which has risen to over N1.97 trillion at the end of the second quarter in 2016.

The bank has maintained a tight control on operating expenses after a sharp slowdown in 2015. Operating cost declined marginally year-on-year at N49.01 billion at the end of the second quarter. Operating cost margin has dropped from 32.1% in the second quarter of last year to 23.4% this year. This enabled the bank to moderate the impact of rising impairment charges and weak interest income on the bottom line during the review period.

The bank has strengthened its profit capacity from a 3.6% decline in the first quarter to a 45.1% advance at the end of the second quarter. Net profit rose from N25.61 billion in the first quarter to N77.46 billion at the end of June. After tax profit is projected at N125.6 billion for GTB at the end of 2016, an expected top growth record of 26.3% 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. It has maintained a sustaining growth trend in profit for several years albeit a sustained slowdown. Profit growth is expected to be stronger this year than any time since the historic advance of 66.8% in 2012.

Management broke the caution on credit expansion in the second quarter and grew the portfolio by close to N200 billion in three months. It had ended the first quarter with a slight decline in net credit portfolio from N1,373 billion at the end of 2015 to N1,363 billion at the end of March. The caution on growing risk assets had been on since 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 bank closed the second quarter operations with a net profit margin of 36.9% – one of the highest in the banking sector. Earnings per share amounted to N2.74 kobo at the end of the second quarter with a full year expectation of N4.27 against N3.51 at the end of 2015. An interim dividend is expected but yet to be announced at press time.