Solid bottom-line growth, buoyed by sturdy top-line performance: Guaranty posted strong top-line and bottom-line performance as gross earnings and after tax earnings grew markedly by 38.8% YoY and 61.9%YoY respectively in Q1’17.
Interest income rose sharply by 50.6% YoY to N55.8 billion in Q1’17, thanks to strong asset yield (c.20%) particularly in treasury securities. Non-interest income improved marginally by 5.0% to N20.5 billion, largely due to the slowdown in E-banking income following the suspension of international card transactions in Q3’16.
Provisions for impaired loans increased moderately by 12.6% YoY to N3.8 billion but declined significantly by 53.6% QoQ from N8.2 billion recorded in Q4’16; cost of risk also declined marginally to 0.23% in Q1’17 from 0.25% in Q1’16.
Net loans declined by 1.7% QoQ to N1.56 trillion, revealing management’s aversion to creating loans. However, the fixed income portfolio grew by 8.3% in Q1’17.
Slight moderation in earnings owing to previous year high base: Following the economic downturn, Guaranty refrained from credit asset creation and focused on growing its fixed income portfolio. With annual yields on treasury bills hovering around c.20%, we expect income from the fixed income portfolio to continue to support interest income (+44.0%) in H1’17.
Nevertheless, we expect gross earnings to contract slightly by 0.49% to N207.2 billion, driven by our projection of a 50.3% decline in non-interest revenue – non-interest revenue in H1’16 was buoyed by one-off revaluation gains of N61.3 billion. We expect impairments to moderate significantly by 66.7% to N12.5 billion in H1’16.
We also envisage impairment write backs on the bank’s trade portfolio (which was initially classified as a result of the initial FX illiquidity). We expect after tax profit to remain largely unchanged, declining slightly by 1.03% to N76.7 billion in H1’17.
TP raised but counter downgraded to Hold: With the upward revisions to our earnings projections in H2’17, our revised TP for GUARANTY stands at N36.65 (Previous: N32.68), which implies a 0.1% return potential from current price of N36.61.
The moderate rise in our valuation is hinged on our expectations that after tax earnings growth will slow down in FY’17 due to the one-off FX revaluation gains (N87.3 billion) in 2016. We also believe earnings growth may slowdown in subsequent years due to a potential moderation in the yield on government securities.
Thus we downgrade the counter to a HOLD. The counter is trading at a P/BV of 1.9x which is at a premium to peer average of 0.8x and Bloomberg’s Middle East and Africa peers of 1.1x.