GTB: Rising credit losses hurting profit growth

Guaranty Trust Bank faces one major challenge this year on earnings performance and that is an upsurge in credit losses that happened in the first quarter. This has raised the bank’s cost-income ratio, lowered profit margin and weakened the earnings growth momentum of the bank in the current year.

At the end of the first quarter, provision for loan losses was already standing at one-half of the 2014 full year figure. Will the cost encroachment into the bank’s revenue continue in the course of the year or will it abate in subsequent quarters is the critical development to watch on Guaranty Trust Bank in 2015.

Segun Agbaje, managing director/CEO of the bank, was unable to defend profit margin in the first quarter in the light of the unfavourable cost behaviour. Apart from loan loss expenses, interest cost is another area of challenge for the bank’s management this year. Interest expenses grew ahead of interest income in the first quarter, leaving no room for any cost saving there.

The only main cost line apparently under control is operating cost and management took the advantage to achieve substantial cost moderation. With a moderated growth in operating cost, management was able to temper the effects of rising loan loss and interest expenses on the bottom line at the end of the first quarter.

The bank closed first quarter operations with gross earnings of N79.02 billion, which is an increase of 17% year-on-year.  Based on the first quarter growth rate, gross income is projected at N318.4 billion for Guaranty Trust Bank at the end of 2015. That would be an accelerated growth of 28% over the 2014 closing revenue figure of N278.52 billion. The bank grew gross earnings by 14.8% in 2014.

Fee-based income is the main driver of revenue growth for the bank this year, which rose by 26% to N23.20 billion in the first quarter. This is twice the growth rate of 13.2% in interest income, which amounted to N54.95 billion at the end of the first quarter. The comparatively slow growth in interest income seems to reflect a flat growth in loans and advances and a moderate increase in the investment portfolio.

After tax profit amounted to N26.56 billion for Guaranty Trust Bank at the end of the first quarter, an increase of 15% year-on-year. If the current growth rate is maintained to full year, the bank is expected to close the year with a net profit of N105.1 billion. This will be an increase of 6.5% over the net profit figure of N98.69 billion in 2014 but a slowdown from the growth rate of 9.6% in the prior year. The bank has maintained consistent growth in profit since the post financial crisis trading.

Profit growth in the current year is affected by an upsurge in loan loss expenses and a decline in net interest margin. Loan loss expenses rose by 176.3% to N3.53 billion year-on-year in the first quarter- already one-half of the full year provisioning figure for 2014. Interest expenses grew ahead of interest income at 14.5% thereby reducing net interest margin. The cost increases were tempered by a moderated growth in operating expenses at 9.7%. Operating cost margin declined from 35.3% in the first quarter of last year to 33.1% this year.

The decline in operating cost margin was however insufficient to fully neutralize the cost increases during the period, which resulted in a decline in net profit margin from 34.2% in the first quarter of last year to 33.6% this year. The bank closed last year’s operations with a net profit margin of 35.4%. Profit margin has continued to creep down from the peak record of 39% in 2012. This is however in line with the general trend in the banking sector.

The bank earned 94 kobo per share at the end of the first quarter, up from 81 kobo in the same period last year. Full year earnings per share expectation is N3.57 for Guaranty Trust Bank in 2015, an expected improvement from N3.47 in 2014. The bank paid a total dividend of N1.75 per share for its 2014 operations, which may be repeated at the end of 2015.