Increasing TP: BUY (maintained): TP: NGN21.8 (previously NGN19.4)
Guaranty Trust Bank (GTBank) recently held a conference call to discuss its FY15 results and 2016 outlook. We learnt: 1) a loan mix shift towards naira assets has helped shield NIM; and 2) asset quality is still holding steady owing to its outsized exposure (70%) to large corporates (up from 53% in 2009). NIR is a potential weak spot in 2016, but we now think steady margins coupled with some higher-yielding naira loan growth and cost control should go a long way towards helping to offset this. We raise our FY16E PBT by 17%, and as a result increase our TP by 12% to NGN21.8; maintain BUY.
NIM defence: Shifting loan mix to naira assets and lower CoF Asset yields have been under pressure since September, but GTBank has been nimble in its response. In addition to benefiting from lower funding costs: 1) the CRR
release in 3Q-4Q15 helped fund growth in the loan book, up 7% QoQ and 8% YoY; and 2) upstream oil loans were reduced using deposits in customers’ debt service reserve accounts (upstream down to 19% of loans vs 24% in 1H15). According to management, these helped to drive a significant mix shift, with the naira weight rising to 54% in YE15 (56% today) from 49% in FY14; the bank aims to reach 60% by YE16 with 10% loan growth (mostly naira, with some FX lending to oil companies for capex). Thus, while asset yields are down 70 bpts YtD to 11.7%, funding costs have improved by 60 bpts vs FY15 to 2.8%, with management highlighting steady NIM YtD and potential improvement as rates pick up following the recent MPR and CRR hike (NGN33bn expected deduction for GTBank vs NGN37bn for Access). We have moderated our FY16E NIM forecast to flattish vs an 80-bpt decline previously.
NIR risks exist but management confident they can be offset
The key 2016 risk we gauged from the call is around NIR, largely driven by likely non-recurrence of revaluation gains (NGN5bn in the base), weak local currency and credit-related fees due to FX scarcity and weak credit growth, and the planned review of the bankers’ tariff, which management thinks has net negative implications for sector earnings. We forecast a 4% YoY decline in NIR but note potential upside risks arising from the recent passage of the budget by the national assembly.
Management’s 2016 PBT growth guidance of 4% to NGN125bn assumes the status quo, which implies no devaluation (GTBank has a $700mn long position that benefits from a devaluation and improves CAR by 60 bpts in the event of a 20% devaluation), continuing FX challenges and no improvement in interest rates. We think 10% credit growth coupled with steady margins, 4% cost growth and CoR of c. 1% takes us to management’s PBT guidance, but implies a 220-bpt decline in RoE to 23.5%.
Falling RoE a concern but raise TP to NGN21.8 – maintain BUY
In line with the strength of management’s updated guidance, we raise our 2016 PBT forecast by 17% to NGN125bn, and by 5-7% for 2017-2018E. However, we note the continued decline in GTBank’s RoE over the past few years, shedding 2 ppts in each of the past two years, not least due to the increasingly difficult regulatory and banking environment. RoE is fast approaching CoE (20.6%), but with the share price having fallen 50% from its 52-week peak and now trading at 1x forward book, we reiterate our BUY rating and raise our TP to NGN21.8. We also think the operatingenvironment presents room for GTBank to further consolidate market share organically as other banks falter.
