Performance: Strong top and bottom-line growth but elevated cost of risk threatens growth
- Profit after tax grew by 25.4% y/y, supported by an increase in both funded and non-funded income
- Funded income was up by 29.9% y/y largely due to volume growth in government securities
- Non-funded income grew by 16.6% y/y following a 37.9% y/y increase in fees and commissions
- Cost of risk (“COR”) remained elevated, rising by 375bp y/y to 6.7%.
- This was driven by an additional GHS 61.6m in provisions, taking total impairments for 9M2021 to GHS 251.6m
- RoaE declined by 468bp y/y to end the period at 22.2%
Outlook: Additional impairments clouds earnings visibility
- Despite CoR more than doubling y/y, bottom-line growth remained impressive
- However, given the uncertainty regarding the extent to which restructured loans could impact impairments, we have turned significantly cautious about earnings growth
- According to management, reclassification of some loans in the hospitality and commerce sectors with an estimated value of ~GHS 800m contributed to the rise in impairments and NPLs more broadly
- Consequently, management indicated that the cost of risk could rise to GHS 300.0m by FY2021. This suggests an additional GHS 50m in impairments in 4Q2021
- While management suggests this may be the worst-case scenario, the hospitality sector remains constrained despite the opening up of the economy
- In effect, we could see further impairments beyond management’s guidance
- The significant deterioration in asset quality in a period where credit growth has been muted, raises concerns about the bank’s risk management and affects earnings visibility going forward
Valuation: Under Review
- We have placed our recommendation under review as we weigh the implications of the emerging asset quality issues
- GCB is trading at a P/B of 0.6x and we expect to publish our rating on the stock in 4Q2021