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Facts behind GTB's high profit growth - THE CITIZEN

By The Citizen

Guaranty Trust Bank grew net profit by 77% in 2012 to a new peak of N86.19 billion. This is the strongest profit growth the bank has recorded since it resumed profit growth in the post financial crisis period in 2010. Net profit growth accelerated from 37.5% recorded in 2011.

The bank's high profit growth in 2012 was a fact of three major developments during the year. The first and the most important fact behind the success of 2012 operations is a windfall coming from a big drop in loan loss provisions. This is the main cost element that has affected profit performance in recent years not only for GTB but also for the banking industry as a whole.

Provisions for credit losses fell by 96% from N20.68 billion in the preceding year to just N836 million in 2012. This is against a high jump of 130.2% in 2011. The drop in loan loss expense is an indication of both a huge debt recovery success and improving quality of the bank's risk asset portfolio.

The drop in provisions for credit losses enabled the bank to transfer the biggest cost saving in the year directly into profit. In 2011, provisions for loan losses claimed 11.3% of revenue but this dropped to only 0.4% in 2012. The sharp drop in provisions saved close to N20 billion for the bank, accounting for a major part of the big profit lift the bank achieved in 2012.

The second major part of the bank's profit growth in 2012 is another cost saving from operating expenses. The bank's operating cost during the year grew by only 10%, showing a decelerating trend for the second year. The bank therefore grew gross earnings at a much stronger pace of 22% than operating cost.

The favourable outcome of the moderation in operating expenses is a drop in operating cost margin from 38.3% in 2011 to 34.6% in 2012. With this development, the bank achieved in 2012 the lowest operating cost margin in many years and apparently one of the lowest cost margins in the banking sector in the year.

The low cost structure of the bank also empowered it to build the profit figure in 2012. The drop in the operating cost margin meant a saving of more than N8.0 billion into profit in the year.

The third leg of the bank's high profit performance tripod in 2012 is the accelerated growth of 22% in revenue compared with an increase of 18.5% in the preceding year. The stronger revenue growth enabled the bank to convert much of the N39.5 billion net increase in gross earnings into profit. Accelerating revenue and largely moderating cost structure of the bank were its success strategy in 2012.

One key cost item however failed to follow the generally moderating cost behaviour last year and this is interest cost. Interest expenses rose ahead of gross income at 42% compared to 22% and therefore claimed an increased share of gross earnings during the year. Its share of gross income expanded from 15.3% in 2011 to 17.8% in 2012. This meant that the bank paid more than N5.6 billion in 2012 over and above what it should have paid at the rate of 2011.

Interest expenses also grew ahead of the 35% growth in interest income. This had the effect of lowering the bank's net interest margin in the year. The high growth in interest expenses failed to spur growth of deposit liabilities. Deposits grew by only 10% and with that, the average cost of the naira of deposits rose from 2.6% to 3.4% over the review period.

The increase in the average cost of funds is however more than compensated by the widening of net interest margin during the year. The bank earned an average of 21.7% on its outstanding loans and advances in 2012 compared to 17.9% in the preceding year. The net interest margin of the bank therefore increased from 15.3% to 18.3% over the review period.

The generally favourable revenue and cost relationship of the bank last year enabled it to convert the biggest proportion of earnings into profit than it has achieved in many years. The bank lifted net profit margin from 26.7% in the preceding year to 38.8% in 2012 - a new record for normal banks in the industry.

Net assets per share improved from N7.83 in 2011 to N9.63 in 2012. Earnings per share also grew from N1.69 to N3.06 over the period. The bank has declared a final dividend of N1.30 per share, having paid an interim dividend of 25 kobo per share in the course of 2012 operations. The register of shareholders is scheduled to close on 11th April and payment date is 25th April 2013.

GTB's gross income in 2012 is 72.3% of the Zenith Bank's figure for the same year. When it comes to profit performance however the gap closes. GTB's net profit stands at 86% of Zenith Bank's figure, the difference being in the profit margins.

GTB is ahead of Zenith Bank on net profit margin at 38.8% compared to 32.6%. It also beats Zenith Bank with lower operating cost margin at 34.6% compared to 38.9%. While GTB's gross income is just 61.3% of Ecobank Transnational Inc's figure of N362.14 billion for 2012, its net profit is more than twice the ETI's figure of N42.61 for the same period.

Earnings outlook for the bank in 2013 indicates continuing growth in revenue and profit though growth may slow down significantly in the year. Two key sources of the 2012 profit windfall are likely to be missing in 2013. Instead of a drop, loan loss provisions are expected to grow in 2013 and a further drop in operating cost margin is also not anticipated. Continuing growth in revenue is however expected to permit normal growth in profit in 2013.