Guaranty Trust Holding Company Plc (GTCO) has raised hopes to recover from two successive years of profit decline with an optimistic profit improvement of 35 per cent to N58 billion in the first quarter (Q1). However, the challenges of rising cost pressure that dropped profit numbers in the past two years are not yet giving way for a smooth rebound.
Cost of funds is on another high-speed growth this year at over 63 per cent in the first quarter to almost N22 billion, accelerating from about 43 per cent rise to N66 billion at the end of 2022.
That beats the increase of 47.3 per cent in interest earnings to N104 billion over the period, pointing to the challenge of using a higher cost of funds to generate the naira of interest income.
With a further upward review of the benchmark interest rate by the Central Bank, the pressure from interest expenses on earnings could intensify for the bank in the year.
Slowed by the increase in the cost of funds, net interest income grew by 43.6 per cent to N82billion at the end of the first quarter.
Interest earnings are nevertheless making the biggest advance that the bank has seen in many years – which is its major operating advantage in the current financial year. The first quarter growth rate is a major acceleration from an increase of 22 per cent to N325 billion at the end of last year.
The bank had lost interest earnings most of the years since 2018 and the closing figure for 2022 remains slightly down from the 2017 mark of over N327billion. GTCO, therefore, looks quite good to register a new peak in interest income based on the first quarter growth rate.
The high performance on the side of interest earnings is however significantly diluted by slow growth in non-interest income at 10 per cent to N54 billion in the first quarter.
Net trading income, which led the growth in non-interest income last year, is equally leading the drag this year with a drop of 30.5 per cent in the first quarter.
The second hurdle for the bank on the path of recovery is that credit losses are racing upward for the second year. Loan impairment charges jumped ahead a clear 185 per cent in the first quarter to stand at N3.4 billion at the end of the period.
This is further to a rapid growth of 40.5 per cent in loan loss expenses to roughly N12billion at the end of the 2022 financial year.
The rapid growth in credit loss expenses again slowed down the growth of net interest income after net loan impairment charges – which still grew impressively at 40.6 per cent to N78.7 billion at the end of the first quarter.
Hopes for recovery are boosted by cost savings obtained from operating expenses in the first quarter, which grew by one-half as fast as gross earnings. While gross earnings rose by over 32 per cent to N158 billion, total operating costs grew by 16.7 per cent to N48 billion.
Operating cost margin went down from 40.2 per cent to 35.5 per cent over the review period, indicating a major reduction in operating cost per naira of gross earnings over the period.
The bank’s operating results in the first quarter were therefore extracted from hope-raising functions of growing revenue and moderated operating costs and also, the opposing forces of rising interest expenses and credit losses.
A slight upper strength of the favourable functions enabled a marginal improvement in net profit margin from 36.1 per cent in the same quarter last year to 36.8 per cent this year. How the forces would play out in the coming quarters will shape the recovery prospects of GTCO in 2023.
The bank earned N2.04 per share at the end of March 2023, rising from N1.51 per share in the same period last year.