THUR, APRIL 23 2020-theG&BJournal- GUARANTY released its Q1-20 earnings Wednesday, which was in line with analyst expectation. The performance was supported by moderate growth in both interest and non-interest income, alongside industry-best efficiency. Also, the bank proposed a final dividend of NGN2.50/s, which translates to a dividend yield of 11.0%, based on the last closing price of NGN22.70 (2nd March 2020).
Interest income grew by 3.4% y/y in Q1-20 to NGN77.04 billion, supported by growth in income from loans and advances to customers (+6.1% y/y), and investment securities (+8.2% y/y), both of which masked declines across interest income from cash (-57.3% y/y), loans to financial institutions (-97.7% y/y) and assets pledged as collateral (-16.5% y/y). We note that the strong growth recorded in risk assets (8.1% YTD to NGN1.62 trillion), and investment securities (+10.3% YTD to NGN1.02 trillion) were responsible for the acceleration in interest income from those lines.
On the other hand, interest expense pared by 21.6% y/y to NGN12.75 billion, despite an increase in deposits by 9.4% YTD to NGN2.77 trillion, as the bank has seemingly continued to improve it’s CASA (low-cost deposits: current and savings accounts) mix during the year, in the face of an expectation of soft interest income growth. Consequent on the strong balance sheet management, net interest income growth was strong, expanding by 10.4% y/y to NGN64.28 billion.
Non-interest income moderated in the period, settling 1.1% y/y lower at NGN34.92 billion, with major lines recording declines save for gains from FX revaluation (+220.3% y/y at NGN8.45 billion). While NII may be weaker in the year, given revised charges and weaker transaction flows occasioned by the global pandemic. For us, the positive impact of revaluation gain should more than offset the weaknesses in NII. Given the growth in interest income, and despite the exponential growth in loan loss expenses (+87.8% y/y to NGN1.22 billion), the bank recorded an expansion in operating income of 5.5%y/y.
Operating expenses expanded by 10.9% y/y to NGN39.77 billion, with the most pressure exerted by regulatory charges – AMCON levy (+11.2% y/y to NGN8.59 billion) and NDIC premium (+17.8% y/y to NGN2.38 billion). Consequent on the OPEX growth relative to operating income growth, cost-to-income ratio (ex-LLE) settled higher at 40.6% relative to 38.6% in the corresponding period of the prior year. Consequently, profitability was stronger, with profit-before-tax settling 2.1% higher year-on-year, while profit-after-tax settled 1.6%.
Cordros Research Comment: ‘’As expected the bank recorded a muted performance in Q1-20. From the numbers posted, we’ve started to see the impact of much increased risk asset creation, which has also affected LLEs. We expect pressure on that line in 2020, even without significant NPLs growth, given regulatory forbearance expected due to the impact of COVID-19 on the economy. Nonetheless, we expect the bank to record a decent performance in the year, supported by non-core earnings (FX revaluation gains). Our estimates are under review.’’
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