THUR 22 APRIL, 2021-theGBJournal- Guaranty Trust Bank Plc (Guaranty) released its Q1-21 earnings after the close of market trading yesterday, which showed that the bank recorded decline in earnings.
EPS of NGN1.60/s (Q1-20: 1.77/s)
Profit before tax of N53.7 billion
Non-interest income NGN42.89 billion
Interest expense pared by 38.3% q/q to NGN7.87 billion
Operating expenses-NGN39.78 billion
The bank recorded an EPS of NGN1.60/s (Q1-20: 1.77/s). The bank’s performance was pressured by weak funded income growth, while non-funded income growth was positive and strong.
Interest income declined by 21.7% y/y to NGN60.31 billion, driven by a reduction in income from investment securities (-47.6% y/y), and cash balances with banks (-50.6% y/y), both of which overshadowed the growth in loans and advances to banks (+169.4% y/y). The decline in income from investment securities was expected given yields on fixed income instruments in the prior year.
Looking ahead into subsequent quarters, we expect a reversal from the declining trend considering that yields on instruments have risen precipitously, even as we expect the bank to reinvest maturing funds. Also, we expect income on loans and advances to customers to rise as the bank expands its risk asset base in the year.
On the other hand, interest expense pared by 38.3% q/q to NGN7.87 billion, despite an increase in deposits by 30.2% q/q to NGN3.60 trillion, as the bank’s CASA (low-cost deposits: current and savings accounts) mix expanded to 86.3% (Q1-20: 84.6%). Consequent to the strong balance sheet management, net interest income declined, contracting by 18.4% q/q to NGN52.43 billion.
We note that CASA has deteriorated on a year-to-date basis as the bank took on some higher-cost (term) deposits, likely to fund long-term asset growth. Given the weak funded income growth, which outweighed the decline in expense, the bank recorded an 18.4% y/y decline in net interest income. After accounting for credit impairment charges (+52.1% y/y), net Interest income pared by 19.8% y/y.
Non-interest income however grew during the period, settling 22.8% higher y/y at NGN42.89 billion, following growth in net fees and commission income (+7.8% y/y to NGN14.61 billion), gains from FX trading (+66.2% y/y to NGN7.47 billion) and increased income from investment securities (+50.4% q/q to NGN1.39 billion).
While the income from e-business was a strong contributor, the bank recorded strong growth across other fees and commission lines to maintain the level of income generated in the prior quarter. We are optimistic that the growth here will be maintained through the fiscal year and remain supportive of income generation.
Operating expenses remained relatively flat y/y at NGN39.78 billion, with the most pressure exerted by regulatory charges – AMCON levy (+10.0% q/q to NGN9.44 billion) and non-cash expenses (+3.7% q/q to NGN7.10 billion).
Consequent to the OPEX growth relative to operating income decline, the cost-to-income ratio (ex-LLE) settled higher at 42.6% relative to 40.6% in Q1-20. Consequently, profitability deteriorated, with profit-before-tax settling 7.8% lower year-on-year, while profit-after-tax settled 9.0% lower year-on-year.
According to Cordros Research analysts, the performance reflects the current environment, wherein banks had to invest in low-yielding fixed income instruments through most of 2020, while also being unable to measurably grow risk assets given the weak macroeconomic environment. This would have been the trend in 2021, after backing out extraordinary gains from FX revaluation.
‘’In subsequent quarters, we expect risk asset creation to ramp up, as bank reinvests maturing funds from investment securities in significantly higher-yielding assets. This will provide a backdraft and propel funded income performance, which would supplement non-funded income growth,’’ Cordros said.