Earnings Update: Guaranty Trust HoldCo Plc Q1 2022 – One-Off Expenses Shrink Profitability

Event

Guaranty Trust Holdings Company (‘the Group’) reported a mixed financial performance in Q1 2022. Gross earnings grew by 13% YoY to N119.59bn, driven by a 17% YoY growth in interest income to N70.64bn and a 7% YoY growth in non-interest income to N48.95bn.

 Marginal Improvement of Asset Yields Drive Interest Income Growth

The breakdown of interest income in Q1 2022 revealed that 66% of growth came from an increase in interest income on loans and advances. Specifically, interest income on loans rose by 15% YoY to N50.88bn. This is attributed to the Group’s loan book expansion by 7% YoY to an average of N1.76trn in Q1 2022 (Q1 2021 average loan book: N1.65trn), and repricing of loans that occurred during the period. Interest income earned on investment securities also grew by 18% YoY to N9.82bn in Q1 2022, on the back of improved yields relative to Q1 2021.

Higher Interest Expense Suggests Funding Pressure

Net interest income grew by 9% – significantly lower than the interest income growth. This was due to a 71% YoY spike in interest expense. We attribute the increase to possible liquidity pressures amid excessive CRR debits. According to the CEO, 60% of the Group’s local currency (LCY) deposits were sterilised (i.e., effective CRR) as of FY 2021. We, therefore, believe that the development possibly resulted in liquidity pressures, thus leading to higher interest expense to attract funding. After deducting impairment charges, net interest income after impairment grew by 11% YoY to N55.99bn.

 Sustained Growth in Fee and Commission Income Lifts Non-Interest Income

Fee and commission income grew by 21% YoY to N21.33bn. The growth drivers were account maintenance charge (+24% YoY to N5.17bn), corporate finance fees (+90% YoY to N1.99bn), credit related fees (+20% YoY to N2.88bn), and commission on foreign exchange deals (+41% YoY to N2.12bn). E-business income grew by 5% YoY to N4.05bn. The growth in fee and commission accounted for nearly 100% of total non-interest income growth in Q1 2022.

One-Off Costs Shrink Bottomline Growth

Operating income grew by 10% YoY to N102.37bn. On the other hand, operating expense grew by 21% YoY to N48.09bn. Thus, cost-to-income ratio worsened by 400 basis points to 47% in Q1 2022 (Q1 2021: 43%). A breakdown revealed that one-off items relating to human resources drove the higher opex incurred during the period. We posit that the human resource expenses were related to the Group’s restructuring. Other cost drivers were regulatory driven such as NDIC and AMCON charges.

The new tax regime took effect as effective tax rate increased to 20% in Q1 2022 versus 15% in Q1 2021. As a result, profit after tax declined by 5% YoY to N43.21bn in Q1 2022.

Outlook

We note that one-off costs incurred were responsible for the profit decline in Q1 2022. Also, the Group typically incurs higher regulatory costs in the first half of the year. Therefore, we expect to see earnings normalisation over the remaining quarters of the year . Therefore, we expect to see earnings normalisation over the remaining quarters of the year. We still expect a N6.07 earnings per share for FY 2022. We maintain our N31.11 valuation per share for the stock and we recommend a BUY

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