Cost-cutting again failed in the third quarter as an alternative route for Guaranty Trust Bank(GTB) to grow profit in the face of falling revenue. The bank followed aggressive cost-cutting drive to build value for shareholders since 2017 but that strategy failed to defend profit up to the end of the third quarter in 2020.
Two main cost elements defied management’s controls in 2020 thereby encroaching on profit margins and undermining profit performance. One is loan impairment expense, which went further out of control in the third quarter. From more than three times increase year-on-year at half-year, net impairment charges on financial assets multiplied more than four and half times at the end of the third quarter.
This is the highest increase in asset impairment expenses for GTB in four years, after massive cut downs for the past three years since 2017. The other hurting expense line is operating cost, which claimed an increased share of gross income.
There was however a slowdown in operating cost in the third quarter from 19 per cent growth year-on-year at half year to 13 per cent rise to N112.4 billion at the end of the third quarter. That remains the highest growth record in operating expenses for the bank in four years.
The cost increases are in the face of persisting revenue weakness, which has been in place since 2017. Gross earnings were only marginally improved at the end of September and the pressure is on both sides of interest and non-interest earnings.
Interest earnings slowed down in the third quarter from 3 per cent increase year-on-year at half-year to less than 2 per cent increase to N228 billion at the end of the third quarter. Non-interest income looked up from a marginal decline at the end of June to nearly 3 per cent improvement at the end of September.
Cost of funds remains the only major cost-saving line for the bank so far and management is slashing as much of it as it can. Interest expenses accelerated on the downside from 20 per cent at half-year to 25 per cent year-on-year at the end of the third quarter.
The further drop in interest cost gave the bank a cost-saving in the region of N13 billion. It claimed a reduced share of interest income during the period at below 17 per cent compared to 23 per cent over the review period.
The cost-saving sustained an increase of about 10 per cent in net interest income at close to N190 billion at the end of September. Cost of funds is dropping for the second year for GTB after a 23 per cent drop in 2019.
The drop of 25 per cent in interest expenses is against an increase of 26 per cent in customer deposits over the nine months of the year, meaning a further significant drop in the average cost of funds. The prospects for the bank closing the 2020 full year operations with the lowest interest expenses in several years improved further in the third quarter.
GTB closed half year operations with gross earnings of N333 billion, which is a marginal increase of 2.1 per cent year-on-year. This is the fourth straight year that the bank has been unable to improve revenue. Interest earnings have been down over the past two years and non-interest income slowed down for the second year to a marginal point at the end of the third quarter.
A good part of the cost-saving from interest expenses was consumed by rising financial asset impairment expenses that soared by 372 per cent year-on-year to over N13 billion at the end of September. The figure has risen by more than two and a half times over the N4.9 billion financial asset impairment charges recorded for the entire 2019 financial year.
The bank closed the third quarter operations with an after-tax profit of over N142 billion, which is a year-on-year drop of 3.2 per cent, stepping up from 5 per cent profit drop at half-year. Profit margin improved from 41.8 per cent at half-year to 42.7 per cent at the end of the third quarter but went down from 45 per cent in the same period in 2019.
The bank’s management resumed expansion of earning assets in the third quarter. Net credit volume to customers rose from N1.4 trillion at half-year to roughly N1.6 trillion at the end of the third quarter. Also, the investment portfolio expanded from N501 billion to N749 billion over the same period.
Despite the improvement, interest income still lost the moderate improvement record in the first half of the financial year as feared at the end of the half-year review.
Rising financial asset impairment expenses are expected to encroach on earnings further in the final quarter. Whether management would be able to counter the impact through further cost-saving and defend the bottom line or post the first profit drop in many years in 2020 is the point to watch on GTB.
The bank earned N5.02 per share at the end of the third quarter, down from N5.19 per share in the same period in 2019. It paid an interim cash dividend of 30 kobo per share at half-year and is expected to at least match its last year’s total cash dividend of N2.80 per share at the end of the year.
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