GT Bank 9M 2019; Good Numbers, But A Howler In Loan Asset Growth

Saturday, October 26, 2019 / 5.00PM / TheAnalyst/Header Image Credit: Proshare

GT Bank's9 months 2019 financial results is a sweet pot of peppered soup. Theingredients are a coloured mix of top line earnings decline, bottom line growthand major cost of risk (CoR) deceleration. But the bank's service quality (aqualitative assessment of the bank's retail activities) has sputtered to a slowgrind as its over-the-counter enquiry resolution mechanism has stayed sluggishand sometimes frustrating, not only does the bank seem to have had a problemwith its time-to-service (queue management) processes, it also appears to bestruggling with its overwhelmed customer relationship desks.

Highlightsof GT's financials ending in September 2019 play up its increased retail marketpenetration and its struggle with expanding credit without compromising loanasset quality.

Highlights

Gross Earnings fell by -3.17% fromN334.8bn in September 2018 to N324.2bn in 9 months 2019
Net Interest Income climbed by +0.75% from N172.94bn in September 2018 to N170.64bn in 9months 2019 (mainly as a result of a -23.3% fall in interest expense)
Profit after tax edged up marginally +3.3% between September 2018 and September 2019, amodest growth in after tax profit
Loans and advances went up by +9.44%Y-o-Y, rising from N1.26trn in September 2018 to N1.38trn in September2019
Customer deposits equally grew between 9 months 2018and 9 months 2019, rising from N2.27trn in 9 months 2018 to N2.39trn in 2019, agrowth of +5.13%
Net Margin went from 42.48% in 9 months 2018 to 45.34%in 9 months 2019 representing a rise of +2.86%
The banks loan to deposit ratio, LDR, between December2018 and 9 months 2019 sprang from 55.4% in December 2018 to 57.6% in September 2019, or -2.6%lower than the CBN baseline minimum LDR of 60% by the end of September2019 and -7.6% from the 65% set by the regulatoras the minimum LDR required of banks by December 2019.

Chart 1 GT Bank Top line Earnings Numbers 2015-2018

Proshare Nigeria Pvt. Ltd.

Source: GT Bank Annual Financial Statements 2015-2018

Chart 2 GT BankBottom line Profit Numbers 2015-2018

Proshare Nigeria Pvt. Ltd.

Source: GT Bank Annual Financial Statements2015-2018

Top lineworries

A recentreport by international consultancy firm, McKinsey Consulting, elaborates onthe challenges banks around the world are having coping with slow globaleconomic expansion and increasing pressure on the quality of risk assets inrespective countries. Compression of top line earnings of banks around theworld signpost a rise in business risk for financial service providers such asdeposit money banks (DMBs). According to McKinsey's researchers in a reportthey recently titled 'The Last Pit Stop? Time For Bold Late-Cycle Moves',they noted that, "A decade on from the global financial crisis, signs thatthe banking industry has entered the late phase of the economic cycle areclear: growth in volumes and top-line revenues is slowing with loan growth ofjust four percent in 2018-the lowest in the past five years and a good 150basis points below nominal GDP growth. Yield curves are also flattening. And,though valuations fluctuate, investor confidence in banks is weakening onceagain."

Theauthors point out that, "Global return on tangible equity (ROTE) hasflatlined at 10.5 percent, despite a small rise in rates in 2018. Emergingmarket banks have seen ROTEs decline steeply, from 20 percent in 2013 to 14.1percent in 2018, due largely to digital disruption that continues unabated.Banks in developed markets have strengthened productivity and managed riskcosts, lifting ROTE from 6.8 percent to 8.9 percent. But on balance, the globalindustry approaches the end of the cycle in less than ideal health with nearly60 percent of banks printing returns below the cost of equity. A prolongedeconomic slowdown with low or even negative interest rates could wreak furtherhavoc."

Thedecline of economic activities in Nigeria (the economy grew by a modest +1.94% in Q2 2019) appears to have flatlinedincome opportunities for local lending institutions, thus resulting in GT Bank's Gross Earnings between December 2018 and September 2019 sliding down by -3.17%. The dip may nothave significantly hurt the bank's bottom line but it certainly weakened what would,otherwise, have been a stronger nine-month performance in 2019 (the bank'stopline gross earnings growth has been fairly modest over the last threefinancial years (see chart 1 above), but its bottom line numbershave been traditionally pacier (see chart 2 above)).

GT Bank'schief executive officer (MD/CEO), Segun Agbaje, has repeatedly emphasized thatthe bank was not in the race for revenue and asset size but in competition forscaled overall business growth and underlying profitability (supposedlyreflected in the banks return on average equity, ROaE of 33.7% inSeptember 2019), and this seems to have been evidenced by the character of thebank's 9 months 2019 income statement, where the bank's weaker topline revenuestill saw a marginal growth in its bottom line number, with profit after taxrising from N142.2bn in December 2018 to N146.9bn in 9 months 2019,representinga growth of +3.35%.

BothInterest Income and Interest Expense dipped during the year, but net InterestExpense fell far steeper (-23.39%) than NetInterest Income (-5.62%), leaving the bank's NetInterest Income growth rate slightly positive at +0.75%.The faster falling Interest Expense relative to its Interest Income suggeststhat GT has strategically pushed down borrowing costs as it expanded its depositsfrom customers (customers deposits grew by +5.13%between December 2018 and September 2019). The growth in deposits at lowercosts raise interesting issues of loan to deposit (LDR) growth and bankliquidity.

Flush with Liquidity, Skinny on Bankable Assets; The New HobbesianDilemma

The CBN'srecent policy guideline on lending requires banks to lend at least 65% of theirdeposits to individuals and businesses that have bankable proposals. The risein the LDR means that banks rather than pay a fine of 50% of the differencebetween their required lending andactual lending, would prefer to create new credit assets at lower interestrates, but are finding this difficult with the economy growing at such a slowpace; new bankable businesses are getting tougher to uncover. The inability to easily translatedeposits into loans has become local banker's new Hobbesian dilemma; they aredamned if they don't and damned if they do.

BetweenDecember 2018 and September 2019 GT Bank's loans and advances grew by +9.44% ahead of the +5.13%advance in its deposits but less than the rate required to meet theCBN's previous 60% loan to deposit ratio (LDR) requirement, thereby resultingin a penalty of N25bn (see chart 3 below).

Chart 3 CBN Debits to Banks inDefault of 60% LDR Requirement Sept. 2019

Proshare Nigeria Pvt. Ltd.

Source: Central Bank of Nigeria (CBN)

Since thedebits by the CBN will go into increasing banks cash reserve requirements (CRR),banks with large debits will suffer margin squeezes as they are compelled toplace their cash in assets that earn zero interest rates as against the risk -freerate of between 13 and 15% earned on T-bills.

Short Selling for Profit

A furthernotable aspect of the business activity of GT Bank over the first 9 months ofthe year has been its busy trading in Treasury bills on margin. The heavyT-bill activity is reflected in the spike in its liability line item for shortT-bill transactions which rose from N1.76 bn in December 2018 to N5.62 bn inSeptember 2019, a rise of about 219%.

Bolsteringincome further was the noticeable rise in fee and commission income fromN40.35bn in September 2018 to N48.38bn in September 2019, a growth of +19.90%. A large part of the increase in this IncomeStatement Item was the result of a +37.18% risein credit-related fees and commissions from N5.89bn in September 2018 toN8.08bn in September 2019. In addition, the bank grew its E-business incomefrom N6.77bn in the first 9 months of 2018 to N11.04bn in the 9 months endingSeptember 2019, or what amounted to a rise of +63.07%on its E-business earnings. Growth also came from FX commissions which rosefrom N4.68bn in the first 9 months of 2018 to N5.45bn in the first threequarters of 2019, a rise of +16.45%. GT alsomade strong commissions for touchpoint services which grew from N914.87m in 9months of 2018 to N1.35bn in the first ninth months of 2019, representing a +47.70% rise in touchpoint income growth.

Bearishon Derivatives

The bankmay have been bullish on Treasury short sells but it was bearish on derivativeinstruments as derivative liabilities fell from N3.75bn in September 2018 toN1.67bn in September 2019, a fall of -55.47%.

Loan Impairments Without IFRS9 Adjustments

Adjustmentsfor the International Financial Reporting Standard (IFRS) 9 rules concerningtreatment of non-performing assets provision showed up strongly in the bank's 9months 2019 performance, with impairment charges reversing from a day-oneadjusted write-back of N295.2m in September 2018 to a charge-offof N575.61m in September 2019. This obviously indicates that the bank will needto accommodate larger write-off figures by year end 2019 compared to full year2018 when the bank was allowed to remodel impairment to the previous year(2017) level for the first year of IFRS9 accounting adjustment (or what wascalled "day one" adjustment). Nevertheless, the bank's loan impairment chargeas a proportion of loans outstanding at 0.20% remains strong and healthy.

Getting Service Delivery Right

From itsfinancials in 9 months 2019, GT Bank had a modest performance in terms ofprofit growth, but showed a tapering of its topline performance. Notionally,customers of the bank have complained about a decline in the quality of thebank's service delivery which seems to be the result of a sudden surge in itsretail service base as banking customers took a flight to safety post bankingmeltdown between 2016 and 2016. The rise in the number of the bank's customershas put severe pressure on operations.

However,the banks Unstructured Supplementary Service Data (USSD) remains one of thebest-in-class and has relieved some of the early frustrations of customers asthe banks Automated Teller Machines (ATMs) have also been majorly functionalwith short cash dispensing cycles.

Likeother banks GT Bank's principal challenge in Q4 may likely be how to meet theCBN's 65% LDR requirement without hurting its NPL to Loans ratio. In thecontext of a local Nigerian adage, "The bigger the head, the bigger theheadache", few envy bankers at times like this.