Q2,2021: CRITICAL METRICS BEHIND GTB’s SUBDUED PROFITABILITY

Guaranty Trust Bank plc does not run a race of building assets for the sake of that alone . This is reflected in a strategic ethos shared widely by its top management that is often retreated by its Managing Director and Chief Executive, Segun Agbaje : “We are not in the race for revenue and assets size but in competition for scaled overall business growth and underlying profitability” , he would beat his chest usually after a financial year or any other appropriate opportunity . And to confirm its efficacy he would declare : “we posts the best performance metrics in the Nigerian banking industry in terms of all financial ratios and one of the best managed banks in Nigeria .

Indeed , that remains the joker in the hands of its management that makes it not only highly profitable but the most efficient bank ; this has become a tradition that makes the bank highly competitive and respected .The belief is driven by a managerial fact that bigness without stretch and leverage is obesity just smallness without stretch and leverage is impotence. Other world class companies and CEOs share the same philosophy.

However , something seems to have gone wrong recently ; not with that strategy but its execution . For this, the strategy did not live up to the expectations of bank’s in the first and second quarters of 2021 as those results questioned its efficacy .The first quarter misfortune is just a tip of the iceberg .as the second quarter is worse.

For the leadership of GTB the ongoing financial year is a baptism of fire . The operating environment for this economic agent is quite inclement . Expectedly , these had unsavory effects on the bank’s ability to sustain respectable bottom lines as stagnant growth, declining margins and falling market shares hit it in an unusual way that it lost its profitability laurel to a competitor ..

A detailed analysis of this ugly scenario could be seen in and traced to its three critical performance metrics which were lethargic showing the management has lost control of, and which no doubt , subdued both top and the bottom lines These include the Net interest margin , cost to income and non performing loan ratio . ,all of which depreciated leading to its waning profitability and efficiency

NET INTEREST MARGIN

A banker is best rated by his or her ability to lend safely and profitably ; an astute banker does this excellently . To do this , Net interest margin (NIM , a critical measurement comparing the net interest income a financial firm generates from credit products like loans and mortgages, with the outgoing interest it pays holders of savings accounts and certificates of deposit, must take an upward swing sharply if bank must outperform its competitors .

GTB a leading brand in the Nigerian baking industry had a reputation for delivering the best and superlative NIM and other critical performance metrics . This is usually reflected in its whooping Interest Income ,NI and Net Interest Income on yearly basis relative to the size of its earning assets .

.Between 2014 and 2018 , its NIMs ranged between 8.10% and ,8.26% and rose to ,9.01% ,10.42% and 9.23% ; its three and five years averages were 9.55% and 9.00% respectively . Among its peers , the above figures were the highest in the industry in those years . The closest to GTB is Zenith Bank , From 2015 to -2019 its NIM ranged from 8.10% , 7.70% ,8.90% ,8.90% and 8.23%8 while its three and five years averages were 6.8% and 8.37%respectively . For Access Bank between 2015 and 2019 it ranged between 6.00% , 6.20% , 5.80%, 5.30% and 6.60% while its three and five years averages were 5.90% and 5.98% respectively .

The size of net interest income relative to its earning assets which determined by yields on earning assets and cost of funds ultimately determines its net interest margin. Individual bank exploits this maximally to tap heavily from core business of banking that delivers the biggest chunk of the revenue to outperform its competitors .But this is not easy ; this is where the boys are separated from the men in banking and NII is sensitive to both credit risk and market risk and only those players with iron teeth could break the two hard nuts . Market risk is essentially interest-rate risk for loans and deposits ; interest -rate risk will be driven by the maturity structure of the loan book, as well as the match (or mismatch) between the maturity of the loans against the maturity of the funding , known as the interest-rate gap .

GTB had displayed its wizardry in this area over years . That is the reason why it laid less emphasis on the volume or size of its asset relative to its peers . That is joker that gave it profit leadership over Access Bank and UBA even with their bigger assets over years though not limited to this . .

However , in the ongoing financial year of 2021 the bank appears to have lost the control it had gained over years in some critical performance metrics including NIM . Its net interest margin (NIM) contracted to .6.96% in Q1,2021 ,- the lowest in recent times – from .9.89% in Q1 ’20 . In the first half 2021 , it crashed to 6.98 percent from 9.74 percent half year 2020 . This is where every bank is expected to get the bulk of its income as the largest portion of a bank’s assets is allocated by them as earning assets .Sequel to this miserable performance , the damage done to the bottom line was heavy

A better picture of the damage done to the bank’s fortunes by this metric could be seen from its plummeting interest income and Net interest income in the first half of the year under review . Its Interest Income fell by 18.0% from ₦153.7bn to ₦126.1bn while Net Interest Income nosedived by 16 percent to N107 billion from N127.6 billion , This is in spite of increase in its earning assets . Earning Assets position improved to ₦3.1 trillion in H1-2021 from ₦2 .9trillion in FY 2020, constituting 61.4% of Total Asset, a 200bps improvement from the 59.4% in FY- 2020. .Increase in earning assets is expected to drive up its income ..

However , the increase in Earning Assets did not impact positively on Interest Income materially as it was driven by ₦178.2bn growth in Investment Securities at the back of increase in the CBN’s Special Bills holdings priced at 0.5% This is evident in its crashing net interest margin . Profit Before Tax dropped by to N93.1billion in the first half of 2021 compared to N109.7 in the same period of 2020 while Profit After Tax crashed to N79.4 billion in 2021 from N94.3 in 2020

NON PERFORMING LOAN RATIO ABOVE CBN MINIMUM LIMIT

Banking involves taking risks, and then applying effective management of that risk and a critical ratio to measure this is non performing loan. This ratio measures the percentage of the total loans given by a bank that is not been repaid as at when due. A non-performing loan (NPL) is a loan in which the borrower is in default due to the fact that they have not made the scheduled repayments for a specified period on a loan they have taken

Between 2014 and 2016 its non performing loan ratios were 3.15%, 3.21%, and 3.60% respectively These are below the regulatory minimum of 5 percent . However in 2017 and 2018 it skyrocketed to 7.66% and 7.30 6.19 percent In the financial year 2020 its unimpressive risk management led to a big jump of 209.6 percent in loan impairment charges within the period from N2.186bn in 2019 to N6.769bn .This suppressed further the net interest income by 5.8 percent after loan impairment charges to N120.846bn, as against the previous N114.178bn leading to a 6.53 percent and 6.39 percent non performing loan ratios between 2019 and 2020. . Although the management managed down its Loan impairment charges by 30 percent to N4.7 billion in the first half of 2021 from N6.8 billion in the corresponding period of 2020 , its non performing ratio is still above the regulatory minimum of 5 percent as its non performing loan to total assets stayed at 5.99%

RISING COST TO INCOME RATIO

Cost-to-income ratio is the measure of the costs of running a company in relations to its operating income. The higher the ratio, the greater the risk of zero profitability. GTB’s cost to income increased to 38.24 percent in 2020 from 36.11 percent in 2019 .However , between June 30, 2020 June 30, 2021, Cost to income ratio worsened from 43.16% to 48.98% This contrasted sharply with its records between 2014 and 2018 when its cost to income ratio ranged from 44.79%, 44.40% ,40.76% ,38.89% and 37.09%, . Within those periods its three years and five years averages were a 38.91% and 41.19 respectively .

This may be farfetched . The Group recorded a 7.2% growth in Operating Expenses from N83.3 bn in HY 2020 to N89.3 bn in HY 2021. The growth was primarily driven by the depreciation and amortization which grew by 9.3% as a result of incremental charge on capital spend on expanding IT infrastructure in Q4 2020 as well as capitalization of amount spent on Furniture & Equipment, Computer Hardware and Software procured for branches in prior year.

Also , the bank linked this scenario to increase in regulatory charges including – AMCON Levy and Deposit and Other Insurance Premium. AMCON levy according to the bank increased by 27.3% due to the growth in Total Asset and Contingents to ₦4.37Trn in FY 2020 from ₦3.44Trn in FY 2019 ; AMCON levy is computed as 0.5% on preceding year’s Total Asset and Contingents .).

Another factor is the 52.6% growth in Administrative expenses was due to the impact of rising inflation, increased cost of moving cash from surplus locations to deficit locations as branches closed as a result of Covid-19 largely in the first quarter of 2021, the translation of Subsidiaries balances to Naira on the weaker Naira to US$ conversion.

The Group, the bank noted , however made savings on other expense lines (Diesel, Petrol, Electricity etc.) on the back of partial opening of our branches to customers and remote workstations set up for employees during the covid- induced lockdown as customers are pushed and served from our various alternative channels But these did not rescue the bank from the damage at the bottom line as crashed heavily