Analysis: GTB faces loan restructuring surge amid naira devaluation

Despite posting foreign currency revaluation gains induced profits, Guaranty Trust Bank (GTB) is grappling with the repercussions of Nigeria’s currency devaluation, which has drastically reshaped its loan portfolio.

With the Naira plummeting from N461.5/$1 to N907.1/$1 between FY-2022 and FY-2023 (N1309.39/$1 as of March 2024), the bank’s restructured loans have ballooned to N386.2 billion. This stark adjustment underline the broader economic instability, leaving GTB contending with a surge in non-performing loans (NPLs), particularly within the oil and gas sector.

The oil and gas industry, a significant portion of GTB’s portfolio, has emerged as a critical pressure point. Upstream oil and gas loans now constitute 31% of GTB’s gross loan portfolio, up from 30% the previous year.

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The reliance on USD-denominated loans in this sector has intensified the burden due to the Naira’s devaluation, inflating debt obligations for borrowers and straining their repayment capacities.

GTB’s non-performing loans have become a substantial challenge, with IFRS 9 Stage 3 loans—those most at risk of default—closing at 4.2%, an improvement from 5.2% in FY-2022. Despite this slight improvement, loan impairment charges surged by an eye-watering 759% to N102.9 billion.

This dramatic rise in provisions reflects the bank’s effort to brace for expected credit losses, highlighting the fragility brought on by the currency devaluation.

Amidst these financial pressures, GTB’s gross earnings have impressively doubled, rising by 120% to N1,186.5 billion. This remarkable growth is driven by an 80% increase in interest income, which reached N531.0 billion, bolstered by higher yields and an expanded loan portfolio. However, this growth has come at a cost, with interest expenses climbing by 73% as funding costs rise.

Net interest income, a key profitability metric, grew by 68% to N436.7 billion. After accounting for the significant loan impairment charges, net interest income still exhibited a robust 35% increase, reaching N333.7 billion. This emphasizes the bank’s underlying earnings strength, even as it navigates a challenging economic environment.

GTB’s capital adequacy ratio (CAR) remains robust at 21.9%, well above the regulatory minimum of 15%. This strong capital position provides a buffer against potential losses and positions the bank favorably for future expansion and risk-taking. The improved coverage ratio for NPLs, which rose to 191.1% from 175.5%, reflects the bank’s focus on strengthening its balance sheet against bad loans.

In response to the devaluation, GTB has strategically restructured its loans, converting many to Naira-denominated terms. This pivot aims to mitigate the risks associated with further currency depreciation, although it also indicates the severe strain on borrowers dealing with USD-denominated debt.

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The reallocation of GTB’s loan portfolio towards sectors like manufacturing, which increased its share from 14% to 18%, is a calculated move to diffuse concentration risk. Yet, other sectors such as information, telecoms, and transport have seen their loan contributions decline, illustrating the shifting dynamics of Nigeria’s economic landscape.

GTB’s financial results reveal a bank managing significant external shocks while still achieving notable growth. The profound impact of the Naira’s devaluation has led to a substantial restructuring of loans, yet the bank’s robust earnings growth and strategic risk management highlight its resilience.

As GTB continues to navigate these turbulent economic waters, its proactive measures and strong capital position will be crucial in maintaining financial stability and operational integrity. The ability to adapt and innovate will determine how well it can sustain its performance in an unpredictable economic landscape.