Performance: Profitability remains robust but for how long?

• Profit after tax grew by 26.2% y/y to GHS 235.8m driven largely by funded income
• Favourable yields and volume growth in investment securities supported the 36.6% growth in funded income as net interest margin expanded 72bp y/y to 7.9%
• Non-funded income growth was muted at 0.8% y/y despite the strong momentum from transaction banking (fees and commissions)
• Cost of risk soared to 5.3% from 2.2% in 1Q2021 as impairments almost tripled to GHS 190k in the period under review
• The NPL ratio closed at 20.7% compared with 13.0% in 1Q2021 and 7.8% a year ago
• Efficiency improved considerably as the cost-to-income ratio of 53.4% came in 10.9pp better than it did in 1H2020
• ROaE was down 498bp y/y to 22.8% as poor profit growth in 4Q2020 impacted the bank’s 52-week average earnings

Outlook: Elevated cost of risk could lead to volatile earnings

• While we anticipated some deterioration in asset quality, the quantum of provisioning and non-performing loans is a major concern
• What is even more concerning is the lack of clarity pertaining to the source of such provisions
• We are uncertain if this weakness in asset quality is a one-off arising from an off-balance sheet asset which has crystallised into an on-balance sheet liability or perhaps its the regular classification of non-performing assets on the balance sheet
• In our opinion, we believe the most vulnerable sectors in GCB’s loan book which may have given rise to such deterioration are the construction sector and the exposure to government and government-related loans. According to our management discussions, these sectors account for about 25% of the loan book
• Considering the uncertainty surrounding asset quality, we are deeply concerned about the sustainability of earnings momentum

Valuation: Under review

• We are currently reviewing the implications of the emerging asset quality risks and thus we have placed our recommendation under review
• We will publish an update soon after engaging with management on asset quality concerns and related matters