NSE: GUARANTY l Bloomberg: GUARANTYNL EQUITY GUARANTY TRUST BANK PLC First Earnings decline since FY2009 surprises Guaranty Trust Bank Plc. ( GUARANTY ) released its audited Q2:2014 results recently in which the bank recorded a 7% YoY growth in gross earnings while Profit after Tax declined by 10%. The transmission from gross earnings to the bottom line was severely hampered by the increase in loan loss expenses of 287% which occurred as the bank took a provision on loans to a single client. The bank s management clarified the situation stating that the client s passing away necessitated taking a 50% provision, and that the likelihood of recovery is good. Our valuation methodology puts GUARANTY at a target price of NGN34.43 (a premium of 15% from the current market price), and so we place a HOLD recommendation on this stock. Worrisome Pressures from Gross Earnings to PAT: GUARANTY grew gross earnings by 7% YoY to NGN133.99bn (Q2:2013; NGN124.20bn) supported by an 8.39% growth in interest income to NGN99.72bn (Q2:2013; NGN92.00bn) and a marginal growth in non-interest income of 1.86% to NGN32.30bn (Q2:2013; NGN31.71bn). The growth in interest income was facilitated by the growth in loans and advances from Q4:2013, as growth in H1:2014 was tempered as the bank kept its focus firmly on maintaining asset quality. The bank s management have given a 15-20% growth projection in loans and advances for FY2014, of which they expect at least 7% in Q3:2014 which should impact the interest income positively in Q4:2014. We do not see any reason it is unachievable, as the bank has the capacity to grow loans (Liquidity Ratio; 44.12%, LTD; 67.28%, CAR; 19.60%). However, we are sceptical about them attaining the set target especially given their prudence with regards to risk management though we expect better growth in Q3:2014 to push income generation by Q4:2014. First Earnings decline since FY2009 surprises: The bank recorded a 10% decline in Profit after Tax (PAT) to NGN44.01bn (Q2:2013; NGN19.01bn) primarily due to the exponential increase in loan loss expenses of 287.44% to NGN5.10bn (Q2:2013; NGN1.32bn). The increase in loan loss expenses was due to a 50% provision taken on the loans made to a single customer due to the customer s demise, and issues regarding business succession. The bank s management has stated that they will meet with the managers of the estate regarding the loan and that there is a high likelihood of recovery. Also they expect that the loan loss expenses should not rise above the current level for the rest of year. Despite the weaker earning, the bank s margins remain the industry s best; RoAE, RoAA and net margin were recorded at 25.72%, 3.92% and 33.09% respectively, only marginally deteriorating QoQ and YoY. Value is undeniable, HOLD: Undoubtedly this quarter may drag down FY2014 performance if the bank is unable to outperform their current and historical run rates. The lower income generation from non-interest sources, the extent to which loan loss expenses might reverse, and the attendant impact of these on the bottom line remain concerns, however, we remain optimistic about recovery. GUARANTY s earnings imply a Trailing Twelve Month (TTM) P/E of 10.04x and 2.60x P/BV relative to the sector s estimates of 6.98x P/E and 1.58x P/BV. Based on a blend of Equity DCF, DDM, RIM and price multiples valuations we arrived at a fair price of NGN34.43 for the stock, and so recommend a HOLD. Q2:2014 EARNINGS UPDATE AUGUST 2014 Target Price: Rating: HOLD Relative Metrics Current price 29.90 P/E 10.35x P/B 2.68x Forward P/E 9.56x Div. Yield 0.84% 52-Wk av. Vol (mn) 18.60 Fundamental Metrics EPS 2.89 BVPS 11.17 Net Margin 33.09% ROAE 25.72% ROAA 3.92% Cost to Income 45.93% Mkt. Cap (N bn) 879.99 Key Price Metrics Today Return 0.10% WtD Return 4.80% MtD Return 0.00% QtD Return 3.28% YtD Return 10.66% 52-Week Return 30.40% 52-Week Hi 31.80 52-Week Lo 22.67 Year Hi 31.60 Year Lo 22.67 Beta 0.98 14D-RSI 54.99 1.4 GUARANTY NSEASI 1.2 1 0.8 0.6 0.4 0.2 0 A-13 N-13 F-14 M-14 Jolomi Odonghanro jolomiodonghanro@meristemng.com 1 P a g e NGN34.43
Financial Highlights (NGN billion) GUARANTY TRUST BANK PLC H1:2014 Result Profit & Loss Account Q2:2014 Q2:2013 y/y Growth Gross Earnings 132.99 124.20 7.07% Interest Income 99.72 92.00 8.39% Interest Expense 28.15 23.46 20.00% Loan loss Expenses 5.10 1.32 287.44% Net Interest income 71.56 68.54 4.41% Non-interest Income 32.30 31.71 1.86% Operating Income 103.86 100.25 3.60% OPEX 45.36 41.57 9.13% PBT 53.40 57.36-6.92% PAT 44.01 49.01-10.21% Balance Sheet Q2:2014 FY2013 Cash and Cash Equivalent 366.26 307.40 19.15% Loans and Advances 1,038.69 1,007.97 3.05% Other Debit balances 262.88 200.77 30.94% Financial Assets 480.65 505.25-4.87% Fixed Assets 71.33 68.31 4.43% Other Assets 14.22 13.16 8.03% Total Assets 2,234.03 2,102.85 6.24% Shareholders' fund 328.65 332.35-1.11% Deposits 1,568.45 1,442.70 8.72% Financial Liabilities 317.36 309.65 2.49% Other Liabilities 19.58 18.14 7.92% Total Liabilities 1,905.39 1,770.49 7.62% Per share data GUARANTY Current Price 29.90 Trailing EPS 2.89 BVPS 11.17 Price multiples/ratios Corporate Action Shares outstanding 29.43 Proposed Dividend NGN0.25/Share P/E 10.35x Dividend Yield 0.84% P/BV 2.68x RoAE 25.72% RoAA 3.92% Net Interest Margin 8.34% Cost of Risk 0.91% Cost to Income 45.93% Loan to Deposit Ratio 67.28% Net Margin 33.09% 2 P a g e
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Movements in Price Target Company Name: Guaranty Trust Bank Plc. Date Price (N) Previous Target Price(N) New Target Price (N) Previous Recommendation 24/04/2014 28.88 26.70 34.43 HOLD HOLD New Recommendation Company disclosures Meristem or the analyst(s) responsible for the coverage may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally, affect the objectivity of this report. Material interests, which Meristem or the analyst(s) have with companies or in securities discussed in this report, are disclosed below: Company Guaranty Bank Plc. Disclosure a. The analyst(s) hold(s) personal positions (directly or indirectly) in a class of the common equity securities of the company. b. The analyst responsible for this report, as indicated on the front page, is a board member, officer or director of the company c. Meristem beneficially owns 1% or more of the equity securities of the company d. Meristem has been the lead manager or co-lead manager of any publicly disclosed offer of securities of the company over the past 12 months. e. Meristem beneficially holds a major interest in the debt of the company f. Meristem has received compensation for investment banking activities from the company within the last 12 months g. Meristem intends to seek, or anticipates receipt of compensation for investment banking services from the company in the next 3 months h. The content of this research report has been communicated with the company, following which this research has been materially amended before its distribution i. The company is a client of the stock broking division of the Meristem group. j. The company is a client of the investment banking division of the Meristem group. k. The company owns more than 5% of the issued share capital of Meristem l. Meristem has other financial or other material interest in the company. Conflict of Interest It is the policy of Meristem Securities Limited and its subsidiaries and affiliates (Individually and collectively referred to as Meristem ) that research analysts may not be involved in activities that suggest that they are representing the interests of Meristem in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts reporting lines are structured so as to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in Meristem s Investment Banking or Sales and trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analysts published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests. 4 P a g e
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