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  HALF YEAR 2022: GTCO Still Sustains Industry  Cost and Efficiency Leadership       

The operating environment for banks in Nigeria was not quite clement in  the first half of 2022  as it was   few years before   .Nigeria’s economy has been on the descendancy in the last few years creating little or no leeway for corporate entities to head northward   in their financial performance. Nigeria’s oil production remains significantly below approved quota amidst concerns of pipeline vandalization and infrastructural gaps as oil prices hover at close to US$100 per barrel. Notwithstanding favourable oil prices recorded, external reserves declined by 3.4% (US$1.37bn) from US$40.52bn on the last trading day of 2021 to US$39.15bn as of 30 June 2022.;effects of increasing fiscal deficit  crowded out the private sector from the Fixed-Income Securities (FIS) market ;the value of the Naira mirrored the downward trend in reserves as the Naira depreciated in the I&E window and parallel market by 2.8% and 20%, respectively, in the first half of 2022 on the back of declining FX inflows and growing demand.

These developments had a deleterious effect on many bank’s ability to sustain respectable performance in certain critical areas . Despite the above ugly scenario that impacted negatively businesses, GTCO still sustains its cost leadership of the Nigerian banking industry in the first half of 2022 financial year  .  

Under this stifling environment , Guaranty Trust Bank still demonstrated  clearly its unmatched savvy for cost management  . Its Net interest margin at 5.8% ,cost to income at 48.2% ,cost of funds at 1.2% ,Return on Average Equity at 17.9% ,asset yield at 7.1% and Return on Average Asset at 2.8% are the profitability and efficiency indicators  powering its cost leadership , and no one among the tier 1  banks   outperforms it .

 In the last six months its  Group’s Gross earnings trudged    15.1% to ₦239.3bn in H1-2022 from ₦207.9bn in H1-2021 primarily on the strength of  the growth recorded on all revenue lines apart from the Other Income line which dipped by 14.9%.         

The bank, it would appear, had to reach deep into its maturity transformation mandate to improve interest income in the period .  A major highlight of its impressive performance is palpable in the growth of its earning assets ;  its   earning Assets which constitute 63.1% of Total Assets grew by 4.1% to ₦3.58tn in H1 2022 from ₦3.44tn in FY 2021. The growth in Earning Assets resulted from improved funding base backed by the synergy created through the Holding Company i.e. multi-focused business approach and effective execution of the Group’s retail strategy; which is underpinned by customer acquisition, deployment of innovative solutions, tailored product & service offerings and well-defined business segmentations.   .     

 If anything, a racy earning assets figure should result in more robust earnings except may be spreads or the difference between interests earned and interests paid are not quite attractive. It could also be because commissions from non interest dependent transactions are dropping.  

For GTCO in the period under review these two indicators are on the rise ; its interest income grew impressively    despite the  marginal increase in its loan book value     . Interest earnings bettered  in the first half of this year  by 16.7%  at ₦147.2bn from   ₦126.0bn    despite an equally leggy interest expense figure of N26.35 billion or a 38 percent jump from the former N19.04 billion.  The growth in Interest Income was driven by the 17.0% growth in average volumes of Earning Assets. The marked reduction in yields on LCY Placements (7.7% vs 16.8%) doused the marginal pick up in yields on Loans (11.3% vs 10.5%) and Fixed Income Securities (4.7% vs 4.1%), resulting in a marginal dip of the yield on aggregate Assets to 8.0% in H1-2022 from 8.1% in H1-2021.  However , 5% growth in Average volume of Gross Loans (1.7% actual) complemented by the 0.8% yield pick-up translate to a 13.5% growth in Interest earned on Loans and advances to ₦104.1bn in H1-2022 from ₦91.7bn in H1-2021 and played a significant role in aggregate growth of Interest Income. The interplay between interests paid and those received ushered net interest income grew  by  13 percent  ; in absolute terms, investment income  grew to N120.85b   from  N107.06b  .

Although its Net Interest Margin , NIM, came  under pressure largely due to Increase in cost of funds and marginal dip in assets yield ,  GTCO’s  NIM still top  the list  among the top tier banks in the period under at 5.8%  followed only by Stanbic and FBNH  at 5.5 % each; the implication of this on  the investment decisions of GTCO  relative to its rivals is that it performed better  in the first half of this year ; its half year 2022 results show its net interest income is 58.6% of the total net revenue .          

 GTCO ’s non-interest income is not clobbered either ; it beefed up the impressive contribution to the net revenue  from the earning assets . Non interest revenue as a percentage of the bank’s net revenue is 41.4 % growing to N92.1b from N81.8b , a 12.5% increment   . Further details show   the Group grew the volume of its fee-based transactions resulting in a 21.4% (₦8.2bn) growth in Fee and Commission Income to ₦46.5bn in H1-2022 from ₦38.3bn in H1-2021. Fee and Commission growth can be attributed specifically to the growth in Corporate Finance Fees (₦5.3bn vs ₦1.6bn) and Current Account Maintenance Charge (CAMF) (₦9.4bn vs ₦7.8bn) on the back of 28% growth in Turnover Volumes to ₦14.7tn from ₦11.5tn during the same period.

Furthermore, the efficient Dealing Room activities of the bank  delivered a growth of 33.4% on Net Trading Gains which closed at ₦23.6bn in H1-2022 from ₦17.7bn in H1-2021. However, Other Income dipped by 14.9% (₦22.0bn to ₦25.9bn) on account of reduction in FX revaluation & Derivative gains (₦13.5bn vs ₦8.9bn) owing to an appreciation of the Naira at the I&E Window between the closing rate at H1-2022 and FY-2021.   

 Another superiority displayed by GTCO is palpable in its loan impairment charges which decreased  by 25.4% to ₦3.5bn in H1-2022 from ₦4.7bn in H1-2021 due to the level of risk reserves built up from previous years. GTCO is followed by FBNH  whose loan impairment charges declined by 18% other banks as illustrated in the table below show  increase in their loan impairment charges   Positive outlook in terms of macroeconomic variable fed into the predictive ECL impairment model and sustained quality of the loan book.

Despite the fact that its Group’s total operating Expenses (OPEX) grew by 11.3% (₦10.1bn) to ₦99.5bn in H1-2022 from ₦89.3bn in H1-2021 primarily from increased regulatory cost associated with growth in balance sheet size ,  GTCO  remains  the most efficient with the lowest cost to income ratio at 48.2%  . This is visible its  AMCON levy and NDIC premium, incremental depreciation charge arising from capital spend, inflation hovering between 17% -18.6% for most part of H1-2022, effect of increase in energy costs and impact of adverse exchange rate movement against the US Dollar across its  jurisdiction of operations outside Nigeria in H1-2022.

Even its profitability profile remains impressive going by some key profitability ratios relative to other banks .  Overall, the Group closed H1-2022 with a PBT of ₦103.3bn representing an increase of 11.0% from ₦93.1bn posted in H1-2021, with PBT contributions from Banking Entities ex-Nigeria improving to 32.8% in H1-2022 from 25.5% in H1-2021 and the non-Banking Entities accounting for 0.6% of the H1-2022 PBT. In spite of the challenges and head winds which characterized the operating environment with attendant negative impact on businesses and households in H1-2022, the Group posted Pre-tax Return on Average Assets of 3.7% and Pre-tax Return on Average Equity of 23.9% on the

 Though its profit after tax  backtracked marginally by 2.3%  from  N79.4% in the first half of 2021 to N77.6% in 2022 , its Return on Average Asset and Return on Average Equity at 2.8% and 17.9%  remain the best among the top banks in Nigeria

As the Financial Holding Company continues to gain traction,  the bank noted it expected  the revenue base to become stronger and further diversified to withstand stress. It also said it expected  income from Non-Banking Subsidiaries (i.e., Payments, PFA, and Asset Management) to strengthen the Group’s performance with resultant improvement in profitability metrics.

 The bank’s balance sheet was robust as the loan to deposit ratio, liquidity ratio and capital adequacy ratios were 42.70per cent, 38.90 per cent and 22.0 per cent respectively, all well above the regulatory threshold .The Group closed H1 2022 with Balance Sheet size of ₦5.69tn representing a 4.6% growth over ₦5.44tn recorded FY 2021.  Across all its jurisdictions of Operations (West Africa, East Africa and United Kingdom), the Group’s Balance sheet remains well-structured and diversified.  

Group’s Net Loans closed at ₦1.835tn in H1-2022 from ₦1.803tn in FY-2021; the growth noted is from the ₦57.6bn increase in the loan book of Nigeria’s operations, due to increased credit flows to the Corporate (Manufacturing and Telecoms) and Retail Sectors. The growth was adequate to offset the negative impact of the translation of Subsidiaries’ Loan balances to Naira based on currency adjustment (₦425.05/$1 in H1-2022 vs ₦435/$1 in FY-2021) .Management took a decision to de-risk its FCY Loan book and swapped two key obligor loans from FCY to LCY. This action led to marginal improvement in LCY/FCY Loan mix in H1-2022 to 59%:41% from 58%:42% in FY 2021.

The marketing machine of the bank, it would seem is working overtime, growing deposits; that section of the bank’s balance sheet swung up  6.24 percent from   ₦4.012tn in FY 2021   to   ₦4.263tn in H1 2022  . This was to be expected from a bank which ‘focuses and channels its resources only on its core corporate and retail banking activities’, activities which require steep marketing capabilities, and in a world where IT is ubiquitous, a firm understanding of delivering tech based services.  The growth in Customer Deposit Liabilities could be situated on   low-cost funds which increased by 6.5% (₦224.2bn) from ₦3.438tn in FY 2021 to ₦3.662tn in H1 2022, resulting in low-cost deposit mix of 85.9% from 85.7% in FY 2021. Time Deposit Portfolio also grew by (₦26.1bn) in response to increased competition from FinTech’s and Tier 2 Banks who offered higher interest rates, thereby contributing 14.1% to Total Deposits in H1-2022 from 14.3% in FY 2021. Strong execution of the Group’s Retail strategy in the face of challenging operating environment was pivotal to deposit growth. 

But as deposits grew, the bank could not restrict the comparatively faster pace of loans and advances, a key component of a bank’s maturity transformation tool, albeit  marginally .

The bank gave out loans and advances worth a hefty  ₦1.835tn      ,2percent higher ,from ₦1.803tn in FY-2021   was applied; the growth noted is from the ₦57.6bn increase in the loan book of Nigeria’s operations, due to increased credit flows to the Corporate (Manufacturing and Telecoms) and Retail Sectors. The growth was adequate to offset the negative impact of the translation of Subsidiaries’ Loan balances to Naira based on currency adjustment (₦425.05/$1 in H1-2022 vs ₦435/$1 in FY-2021). Management took a decision to de-risk its FCY Loan book and swapped two key obligor loans from FCY to LCY. This action led to marginal improvement in LCY/FCY Loan mix in H1-2022 to 59%:41% from 58%:42% in FY 2021.

We note though that the bigger this item on the balance sheet, the higher the interest income item on the income statement and then the higher the variability or the higher the credit risk.

How did these three items play out in the case of GTCO?  Interest income shot up  while credit risk nosedived .Interest and similar income grew by  16.7 percent   but credit risk as read from the loan to deposit ratio  fell  43 percent from  46.3percent.

The bank  decided not to take  a  greater risk though bristling from the confidence of a healthy balance sheet; after all its assets and shareholder funds can cover for any slips.

The Bank assets which grew 5 percent from   is 1.4 times the deposits level.  The Group closed H1 2022 with Balance Sheet size of    ₦5.69tn representing a 4.6% growth over ₦5.44tn recorded FY 2021.  Across all its jurisdictions of Operations (West Africa, East Africa and United Kingdom), the Group’s Balance sheet remains well-structured and diversified.  

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