GTB’s rising cost may leave profit flat or lower

Guaranty Trust Bank [GTB] continued to lose profit on year-on-year basis up to the third quarter and the bank looks likely to close the 2014 financial with profit either flat or lower than prior year. The bank has experienced rapidly increasing costs this year, which has continued to constrict profit margin. A decline in profit margin slowed down profit growth in 2013 and further loss of margins in 2014 is indicating that a reasonable growth in profit is ruled out for the year.

The bank continues to grow revenue, which is expected to step up this year from a moderate performance in the preceding year. Rising expenses are however keeping profit margin well below the preceding year’s records. Despite the loss in profit margin, the bank still maintains its leadership position on profit margin in the banking sector. Loss of profit margin has been the general trend in the banking industry since the second quarter of this year.

The bank posted an after tax profit of N66.74 billion at the end of the third quarter, which is a decline of 3.6% from the corresponding figure in 2013. This is a continuing decline in profit on year-on-year basis though the margin of decline reduced from 10% at the end of the second quarter. The weak profit performance is expected to follow the bank to full year.

Full year outlook indicates an after tax profit of N89.1 billion for GTB at the end of 2014. This will be a slight decline from the full year profit of figure N89.60 billion the bank posted in 2013. This will be a weaker performance than the modest improvement of 3% in net profit last year. Inability to grow profit has followed the bank’s star performance in 2012 when it lifted profit by 66.8%.

Revenue performance is much stronger than profit and this position is expected to be maintained to full year. Gross earnings amounted to N199.24 billion in the third quarter, which is a year-on-year growth of 9.5%. The growth rate in the second quarter was maintained in the third and the full year outlook indicates gross income in the region of N268 billion for GTB in 2014. This will be an increase of 10.4% over the gross earnings of N242.66 billion the bank reported in 2013. Revenue growth is therefore expected to step up from the 8.8% improvement recorded last year.

The inability of the bank to grow profit this year is caused by rising expenses and therefore a loss in profit margin. While net profit margin ticked up from 33.1% in the second quarter to 33.5% in the third, it remains well below the 38% record achieved in September last year as well as 36.9% at the end of 2013. Despite the decline, GTB is still ahead on profit margin with Stanbic IBTC Bank coming a distant second with a profit margin of 26.7%, followed by Zenith Bank with 26% net profit margin as at the end of the third quarter.

Each of the three main cost elements of the bank claimed an increased proportion of revenue at the end of the third quarter, which led to the decline in profit margin. The main culprit is loan loss expenses, which rose by 128% to N6.05 billion year-on-year at the end of September. Its proportion of gross earnings doubled to 3% during the review period. The bank’s net credit portfolio grew by 15% to N1,161.52 billion at the end of the third quarter against the closing figure for last year.

Interest expenses also grew well ahead of gross earnings at 22% to N42.85 billion in the third quarter. The growth is also unmatched by an 8% improvement in interest income, which led to only a 3% improvement in net interest income. Compared with the 9% improvement in deposit liabilities, the bank experienced an increase in the average cost of funds during the review period. It devoted 21.5% of gross income to interest expenses as at the end of the third quarter operations this year against 19.2% in the same period last year. The high cost of funds in the economy is hurting banks as well as their customers.

The third main cost item that undermined profit performance is operating cost, which also grew ahead of gross earnings at 11% to N68.14 billion in the third quarter. That has increased operating cost margin from 33.6% in the third quarter of last year to 34.2% in September this year. Despite the increase, GTB still maintains one of the lowest operating cost margins in the banking industry.

The bank earned N2.35 per share at the end of the third quarter, down from N2.44 per share in the corresponding period last year. Earnings per share is projected at N3.03 for GTB at the end of 2014, slightly down from N3.04 in 2013. The bank paid a total dividend of N1.70 per share for last year’s operations. GTB can be counted on for regular dividend payment. It has already paid an interim dividend of 25 kobo per share at the end of second quarter operations and shareholders can hope for more at full year.