3 November 2021

GCB 9M2021 Results

In brief

GCB released its unaudited 9M2021 results last week and while earnings were in line with our forecast, the continuous rise in impairments raises further concerns about the bank’s asset quality.

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