Earnings Update Forging aead in te face of eadwinds Guaranty Trust Bank Plc ( Guaranty ) posted an above-consensus earnings performance in its 9M results released Wednesday sowing strong growt in Gross Earnings (GE) to N329.3bn, 43.6% growt y/y, wile pre-tax and post-tax earnings rose 53.0% and 59.0% y/y N140.8bn and N119.9bn respectively. However, q/q GE, PBT and PAT all declined by 11.2%, 18.5% and 18.1% respectively. Rating: BUY Price Target Old: N28.3 New: N30.4 21 October 2016 Guaranty now trades at a 2016 P/BV of 1.5x vs EM peer average of 1.6X and a five-year average of 1.9x. Forward P/E of 6.1x also trails EM peer average of 10.8x. A revision in our model raises our target price to N30.4, leaving 24.3% upside to current price and a Analyst Kayode Tinuoye +234-706-8816-408 kayode.tinuoye@unitedcapitalplcgroup.com BUY rating on te counter. Results Summary Income Statement Q3-2016 Q3-2015 Y/Y Q/Q Securities Trading +234-1-280-8919 securities@unitedcapitalplcgroup.com Gross Earnings 329,284 229,375 43.6% -11.2% Interest Income 181,910 172,964 5.2% 33.7% Interest Expenses -49,161-52,834-7.0% 18.4% Net Interest Income 132,748 120,130 10.5% 40.0% Loan Impairment Carges -57,083-8,516 570.3% -42.8% Asset Management +234-1-280-7822 Assetmanagement@unitedcapitalplcgroup.com Trustees +234-1-280 7853 Trustees@unitedcapitalplcgroup.com Non Interest Income 147,374 56,412 161.2% -41.3% Operating Expenses -79,926-73,843 8.2% 32.7% PBT 140,837 92,062 53.0% -18.5% PAT 119,927 75,160 59.6% -18.1% Key Statistics FY-15 FY-16 FY-17 FY-18 EPS (N) 3.4 6.0 5.3 5.9 BVPS (N) 13.8 14.6 15.1 15.8 P/E (x) 6.9 3.9 4.4 4.0 P/BV (x) 1.7 1.6 1.5 1.5 FY-15 FY-16 FY-17 FY-18 ROAE 24.3% 24.8% 23.9% 41.6% ROAA 3.9% 6.0% 4.7% 4.5% Net Interest Margin 8.5% 8.6% 8.7% 9.7% Cos-to-Income Ratio 38.6% 30.2% 39.7% 39.6% Loan to Deposit Ratio 83.8% 79.2% 79.4% 79.7% Cost of Funds 2.8% 3.0% 3.0% 3.1% Cost of Risks 0.6% 0.9% 0.9% 6.0% Source: NSE, Bloomberg, GUARANTY Sare Price History 1.2 1 0.8 0.6 0.4 0.2 0 GUARANTY All Sare Index Banking Index Source: NSE, Bloomberg, 1
Non Interest Revenue expansion drives top line In line wit our expectation, furter FX revaluation gain (Q3: N32.6bn vs Q2: 60.8bn) drove top line for Guaranty over Q3 on te back of te bank s significant long dollar positioning. However, we note tat te results reflect some weakness in Guaranty s underlying core earnings, a teme tat we expect to dominate banks earnings scorecards for 2016. Despite a strong y/y performance (106.1%), non-interest revenue (NIR) fell 41.3% q/q driven largely by a 36.5% q/q decline in e-business income, a key driver of NIR for te bank. Notably, loan book grew by 5.1% q/q but tat growt somewat masks te 22.4% increase in te funding income line, suggesting tat elevated interest rate environment drove a re-pricing of risk assets over Q3. Hence, Interest income increased 33.7% q/q bucking te trend of negative q/q growt tat we saw over H1-16. Provisioning surprises reflect ongoing macro callenges We ave remained cautious about Guaranty s asset quality for some time now despite management s conservative guidance. Altoug te run-rate of loan loss expenses slowed significantly (down 42.8% q/q), a y/y spike in provisioning carge (570.3%) led to a significant increase in Cost of risk (unannualised) to 3.7% from 2.5% in H1-16 and 0.7% for Q3-15. However, NPL remained witin management guidance of below 5%, declining marginally to 4.1%- from 4.4% in H1-16. Te key downside risk to Guaranty s asset quality going forward remains te bank sizeable Oil and Gas (upstream) and manufacturing sectors wic collectively account for 41.0% of te bank s loan book. Tese sectors remain te weakest and te biggest drivers of current recessionary trends in te domestic economy. Trading Statistics Current Price (N) 24.5 Target Price (N) 30.4 Upside (Downside) 24.3% Dividend Yield 7.2% Total Return 31.5% Historic Return 3 mont 3.2% 6 mont 67.8% 12 mont 0.0% YTD 32.0% Outstanding Sares (bn) 29.4 Market Cap (NGNbn) 720.8 Market Cap (USDmn) 2,273.7 Av. Daily Value Traded (NGN) 493,715,697.2 Av. Daily Value Traded (USD) 1,572,994.22 Source: Company data, estimates Efficiency gains trickle to earnings As alluded to earlier, te tigt policy environment appears to be NIMpositive for Guaranty. Wile Interest expense increased 18.4% q/q on account of a significant increase in deposit cost, reflective of tigt system liquidity over Q3, net interest income grew by 40.0% due to a strong increase in funding income and asset yield. On te cost side, OPEX spiked 32.7% q/q, but te growt in interest income was strong enoug to keep Cost to Income Ratio (CIR) at a multi-year low of 28.8%, versus management guidance of <45%, and 34.9% in HI-16. Te pressure from OPEX over Q3 owever led to q/q declines in pre and post-tax earnings. 2
We maintain our BUY rating wit a revised target price Despite signs of weak underlying earnings, given current callenges in te macro backdrop, Guaranty remains our favoured exposure in te tier-1 banking space. Tis is largely on account its above-peer operating efficiency and ig quality earnings. We ave revised our estimates for FY 2016 on te strengt of tese numbers, and raised our target price by 6.8% to N30.4, representing a 24.3% upside on current, ence our BUY rating on te stock 3
Investment Rating Criteria and Disclosure adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. Tese generic ratings are defined below; Buy: Based on our valuation and subjective view (if any), te total return upside on te stock s current price is greater tan our estimated cost of equity. Hold: Based on our valuation and subjective view (if any), te total return upside on te stock s current price is less tan te cost of equity, owever, te expected total return on te stock is greater tan or equal to te Standing Deposit Facility rate of te Central Bank of Nigeria (wic is currently MPR 200bps; i.e 10%). We consider tis as te minimum return tat may deserve our olding of a risk asset, like equity. Sell: Based on our valuation and subjective view (if any), te total return upside on te stock s current price is less tan te Standing Deposit Facility rate of te Central Bank of Nigeria (wic is currently MPR 200bps; i.e. 10%). We consider tis as te minimum return tat may deserve our olding of a risk asset, like equity, especially as we consider te average 4.5% total transaction cost for an average retail investor. NR*: Please note tat in addition to our tree rating eads, we indicate stocks tat we do not rate wit NR; meaning Not-Rated. We may not rate a stock due to investment banking relationsips, oter sources of conflict of interests and oter reasons wic may from time to time prevent us from issuing a rating on te sares (or oter instruments) of a company. Please note tat we sometimes give concessional rating on stocks, wic may be informed by tecnical factors and market sentiments. Current Stock Rating Dispersion and Relationsip Conflict of Interest: It is te policy of United Capital Plc and all its subsidiaries/affiliates (tereafter collectively referred to as UCAP ) tat researc analysts may not be involved in activities tat suggest tat tey are representing te interests of UCAP in a way likely to appear to be inconsistent wit providing independent investment researc. In addition, researc analysts reporting lines are structured so as to avoid any conflict of interests. Precisely, researc analysts are not subject to te supervision or control of anyone in UCAP s Investment Banking or Sales and Trading departments. However, suc sales and trading departments may trade, as principal, on te basis of te researc analyst s publised researc. Terefore, te proprietary interests of tose Sales and Trading departments may conflict wit your interests as clients. Overall, te Group protects clients from probable conflicts of interest tat may arise in te course of its business relationsips. Analyst Certification Te researc analysts wo prepared tis report certify as follows: 1. Tat all of te views expressed in tis report articulate te researc analyst(s) independent views/opinions regarding te companies, securities, industries or markets discussed in tis report. 2. Tat te researc analyst(s) compensation or remuneration is in no way connected (eiter directly or indirectly) to te specific recommendations, estimates or opinions expressed in tis report. 4
Oter Disclosures United Capital Plc or any of its affiliates (tereafter collectively referred to as UCAP ) may ave financial or beneficial interest in securities or related investments discussed in tis report, potentially giving rise to a conflict of interest wic could affect te objectivity of tis report. Material interests wic UCAP may ave in companies or securities discussed in tis report are disclosed: UCAP may own sares of te company/subject covered in tis researc report. UCAP does or may seek to do business wit te company/subject of tis researc report UCAP may be or may seek to be a market maker for te company wic is te subject of tis researc report UCAP or any of its officers may be or may seek to be a director in te company(ies) covered in tis researc report UCAP may be likely recipient of financial or oter material benefits from te company/subject of tis researc report. Company Dangote Cement Plc Dangote Flour Plc Dangote Sugar Plc Diamond Bank Plc FirstBank Holdings Nigeria Plc Guaranty Trust Bank Plc Guinness Nigeria Plc PZ Nigeria Plc Transnational Corporation of Nigeria Plc United Bank for Africa Plc Disclosure g, Disclosure keys a. Te analyst olds personal positions (directly or indirectly) in one or more of te stocks covered in tis report b. Te analyst(s) responsible for tis report (wose name(s) appear(s) on te front page of tis report is a Board member, Officer or Director of te Company or as influence on te company s operating decision directly or troug proxy arrangements c. UCAP is a market maker in te publicly traded equities of te Company d. UCAP as been lead arranger or co-lead arranger over te past 12 monts of any offer of securities of te Company e. UCAP beneficially own 1% or more of te equity securities of te Company f. UCAP olds a major interest in te debt of te Company g. UCAP as received compensation for investment banking activities from te Company witin te last 12 monts. UCAP intends to seek, or anticipates compensation for investment banking services from te Company in te next 6 monts i. Te content of tis researc report as been communicated wit te Company, following wic tis researc report as been materially amended before its distribution j. Te Company is a client of UCAP k. Te Company owns more tan 5% of te issued sare capital of UCAP 5
Disclaimer United Capital Plc Researc (UCR) notes are prepared wit due care and diligence based on publicly available information as well as analysts knowledge and opinion on te markets and companies covered; albeit UCR neiter guarantees its accuracy nor completeness as te sole investment guidance for te readersip. Terefore, neiter United Capital (UCAP) nor any of its associates or subsidiary companies and employees tereof can be eld responsible for any loss suffered from te reliance on tis report as it is not an offer to buy or sell securities erein discussed. Please note tis report is a proprietary work of UCR and sould not be reproduced (in any form) witout te prior written consent of Management. UCAP is registered wit te Securities and Excange Commission and its subsidiary, UBA Securities Limited is a dealing member of te Nigerian Stock Excange. For enquiries, contact United Capital Plc, 12t Floor, UBA House, 57 Marina, Lagos. United Capital Plc 2016.* 6