Guaranty Trust Bank H1 2015 commentary: Continues to make more from less (Updated)

Dear Africa Interested Individuals:

                                                        Let us talk about GT Bank's H1 2015 performance concisely.  

GT Bank is still committed (by its actions) to relying on lending to drive its earnings unlike its peers.  74% of its gross earnings emanated from interest income and 26% from non-interest income.  Other income is only 49% of net interest income pre-impairment.  Despite the difficult lending environment, the bank is still reliant and succeeding in generating interest income while still being cautious and understanding of the difficult operating environment.  

Net loans to customers rose by less than 2% over the first six months of 2015.  Loans to assets have decreased from 54% - 51% during H1 2015 though still ahead of its peers.  The bank has done the best in terms of fresh lending during H1 2015 as 87% of new loans are reflected as performing.  This has helped the bank to achieve loan value-added of +0.81%  when other peers are negative or flat.  I note that loan value-added has declined from 2.86% as at December 2014 to 0.81%; a decline of 205 basis points.  

GT Bank is debt burdened like many other Nigerian banks and companies.  Debt relative to total capital is 46%, which is way above my safety threshold of 30% where debt starts become more of a burden than an asset.  Gross loans increased by $168.5m while total debt increased by $350.4m during H1 2015 which is more than twice gross loans.  Not surprising, quality of debt utilization declined to 3.04X from 2.54X as at December 31st, 2014.  The bank needs to pay down debt and ensure debt taken is not applied as working capital.  The increase in total debt over the first six months of 2015 was 93% of the increase in deposits over the same period.  

GT Bank is still way ahead of other Nigerian banks and holds its own on the continent also in terms of profitability.  The bank was able to extract 50% more profit from its assets than Zenith Bank (which is Nigeria's largest and most profitable bank.)  This was achieved by a bank that is generating business on average more than 37% less than Zenith Bank and First Bank.  GT Bank's loan book has deteriorated more than that of Zenith Bank during H1 2015 and consequently, Zenith Bank made more received more interest on average than GT Bank on its loan book.  Pre-tax income margin for GT Bank improved by 1.1% year-on-year to 41.3%.  Zenith Bank's pre-tax income margin increased by only 0.1% year-on-year.  GT Bank is not only more profitable, it has gotten better returns on its investments over the past twelve months relative to Zenith Bank.  Once GT Bank can grow its pre-tax income 7% more than that of Zenith Bank, it will become Nigeria's most profitable bank without being among Nigeria's top three largest banks by assets.      

GT Bank is also a lot more efficient than other banks and is able to use this to also beat other banks in terms of RoE, RoA etc.  Its interest expense relative to interest income is much better than Nigeria's two largest banks who have a larger deposit base.  (I utilized actual interest received and paid.)  Its other operating expenses relative to earnings is at 18% which is way ahead of other banks.  Let me remind you that this is a bank that about a year ago let go about 25% of its workforce and still earned the most profit in the fourth quarter of 2014 of any Nigerian Bank.  

Contingent liabilities relative to assets came in just over my limit of 20% at 22%.  This is commendable given Zenith Bank's astonishing off-balance sheet exposure of 78%.  

My major concerns are the size of the drop in its loan value-added, non-earning assets in excess of 5%, less than realistic income statement provision for loans adjudged to be non-performing and debt outstanding beyond safe levels.  In addition, about $29m in interest booked as received had not yet been actually received as at June 30th, 2015.   

GT Bank has too many branches that are not profitable.  It had significant branch expansion in late 2013 and through 2014.  A few pieces of the bank are carrying the burden of all.  The bank has crossed the 200 branch point where by my calculation some tough decisions would have to be made.  First Bank and Zenith Bank are doing more than 50% better than GT Bank as it relates to business generation across its branch network.
    

The bank continues to focus on real banking and squeezing out profit through business generation and increased operational efficiency from a financial and operational perspective.  This is why it remains Nigeria's most financially productive bank (by a long shot) and among the top 10 across the African continent. 

GT Bank is a good bank but not a relatively cheap bank from a Nigerian banking perspective for those with twelve-months or less investment horizon.   

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