What shaped the past week
Global Markets: Global markets were generally upbeat this week riding on further stimulus by the Bank of Japan (BOJ), and assurances by the European Central Bank (ECB) that the bail-out deal in Cyprus (where depositors had to take a 40% hair-cut) was a unique case. The BOJ moved to embark on record easing by doubling the country’s monetary base by the end of 2014 through purchases of government bonds. This means the world’s four largest developed markets have their respective monetary authorities – U.S. Fed, BOJ, ECB and Bank of England (BOE) aligned to spurring growth through liquidity. Despite this supportive environment for commodities, Gold prices remained weak (3% lower WoW) even as the seeming recovery in global economies has meant rotation out of defensive assets. U.S. Equities however stumbled on Friday following the release of the U.S. jobs report which reported only 88,000 jobs added in March, the smallest increase in the past nine months.
Domestic Economy: The Asset Management Company of Nigeria (AMCON) remained topical this week with the most recent IMF Article IV publication recommending the winding down of operations of the “Bad bank” in order to forestall moral hazard and fiscal risks. We note AMCON has acquired Non-Performing Loans (NPLs) within the banking sector worth N5 trillion. Whilst the IMF’s recommendation is plausible, we think the moral hazard risks have been relatively mitigated by the structure of AMCON which creates a somewhat disincentive for excessive risk-taking by purchasing toxic-assets at significant hair-cuts to the banks. Furthermore, AMCON during the week announced that it had stopped purchasing NPLs from the banks since 2012, leaving banks with the option of making full provision in their books.
Equities: After the two-day break, the NSE ASI opened the past week Tuesday with a bull-run triggered by an impressive FY’12 scorecard by GTBank, Zenith Bank and Access Bank amongst others. Riding on positive sentiments, the index clinched a 2.43% day return driven by the Financials, Oil & Gas and Consumer Goods sectors. Subsequently, momentum slowed despite the flurry of results across various sectors, with the NSE ASI return edging up a meager 0.57% and shedding 0.61% on the second and third days of trading respectively. Sell offs remained the pre-dominant theme, especially in the Financial services sector as a further loss of 11bps on the last trading day cut WoW return to 2.28%
Fixed Income: Sentiments in the Fixed Income market turned positive, riding on significant market liquidity from last week’s maturities and Thursday’s OMO maturities of N250 billion. As we anticipated, the Central Bank announced three OMO auctions, including a special auction where a 289-Day bill worth N419 billion was sold at 12.75%. Trading in the T-Bills secondary market however remained bullish despite the OMO auction, with buying focus on the medium tenor bills. The 90 DTM 04-Jul-13, 97 DTM 11-Jul-13 and 111 DTM 25-Jul-13 bills saw the most interest with respective yields declining 117bps, 121bps and 96bps to 10.54%, 10.56% and 10.61%. Correction however set in the Bond market, with yields on the uptrend on most maturities in the course of the week, with the worst hit being the 2017s and 2019s though the benchmark bonds closed the week flat.
What will shape markets in the coming week?
Global markets will likely continue to purr over the U.S. jobs numbers, which could be of some concern to investors. However, we believe market sentiments will switch, with more focus on monetary stimulus and its intended impact on economic growth. With the Earnings season in full swing, we remain cautious on domestic equities in the week ahead. We see profit-taking as the pre-dominant theme, which may subsequently provide buying opportunities in the course of the week. Trading in the T-Bills market will continue to be influenced by the potency of the Central Bank’s OMO activities. Technically, yields in the T-Bills space have come off substantially since the start of the week, especially on the Jun-13 and Jul-13 maturities, as such we do not rule out the possibility of profit-taking in the coming week.
Focus for the week: GTBank FY’12 Earnings – Impressive Across All Metrics
Guaranty Trust Bank Plc (GUARANTY) released FY’12 results Tuesday, reporting an 81% EPS growth. The Board of Directors has proposed a N1.30 Dividend per share, a 53% growth over N0.75 paid on 2011 earnings.
A strong Q4; loans up 7% QoQ
GUARANTY reported a particularly strong Q4, growing loans 7% on a QoQ basis (after a decline in Q3). The bank created N49 billion new loans within the quarter to gross overall loan book to N784 billion (an 11% YoY growth). Whilst we are yet to confirm the source of loan growth, we believe further oil & gas exposures could have contributed. We also like the strong trend in deposit growth within the quarter – up 18% QoQ to N1,172 billion – helping stabilize the banks funding base. In our Q3 note, we had highlighted possible risk to margins as the bank would need to grow deposits, which fell 6% in that quarter. Nonetheless, GUARANTY’s franchise and competitive offerings has aided cheap deposit growth, defying our expectations.
Improved pricing supports earnings
On the back of improved asset yield, GUARANTY posted N221.9 billion gross earnings, a 22% YoY growth. This feat was supported by a higher yield environment in 2012 over 2011. Asset yield rose 300 bps, surpassing the 100 bps growth in liability cost to deliver Net Interest Margin (NIM) of 11% – a historic high. We had estimated FY’12 NIM of 10.6%, however, GUARANTY beat our expectations on both ends (asset yield and liability cost). This feat is testament to management’s astute pricing ability, in a good combination of volume and margin growth. We note however, that holding up NIM at these levels will be no easy task as the yield environment moderates.
Still a leash on cost
On a YoY basis, GUARANTY’s Cost-to-Income Ratio (CIR) eased 300 bps to 43%, better than our 44% estimate. We note that operating expense, although 10% up YoY, was below average inflation rate of 12% for the year. We had highlighted in previous notes that in the absence of any infrastructural upgrades at the macro level, GUARANTY’s cost structure is close to equilibrium, and it is appearing thus. We think that in order to break new grounds, the bank risks raising its cost structure – hence, the headroom for further cost cutting is limited. Even so, GUARANTY’s cost structure remains the industry benchmark, a feat we think will be difficult for peers to replicate.
GUARANTY, fairly priced in our view
In our view, GUARANTY is fairly valued, trading (N25.94) at a 7% discount to our N27.69 target price. GUARANTY currently trades at 9.0x trailing earnings and 2.9x book value (Peer P/E: 8.5x, P/B: 1.5x). Whilst trading at a premium to peers, we think GUARANTY’s strong franchise, exemplary cost management and superior ROAE of 35% (peer 2012E