September 9, 2020/Cordros Report
GUARANTY’s recently released audited H1-20 earnings which showed that the bank recorded a relatively weaker financial performance. While funded and non-funded income settled higher year-on-year, increased regulatory charges as well as VAT-induced cost increases resulted in the bank recording relatively weaker earnings. In our view, the bank’s performance is resilient, earmarked by tight balance sheet management utilised to manage tight regulatory and business environments. Consequently, the bank maintained the nominal value of its interim dividend, year-on-year, and management stated that the bank would seek to maintain its payout ratio around historical levels (55.0-60.0%) for the fiscal year. We valued GUARANTY using a blend of absolute and relative valuation methodologies, through which we arrived at a target price of NGN31.41. This implies a potential upside of 29.3% based on a price of NGN24.30 (9th September 2020). Consequently, we rate the stock a “BUY”.
Balance Sheet Management Propels: The bank maintained net interest margin through the significant reduction in the cost of funding, achieved through the improvement of its CASA mix as customers grew by 1.3 million to 19.80 million over the first half of 2020. We see no scope for further gains on the bank’s CoF, hence we expect NIM to contract in the second half of the year due to lower asset yield – a combination of lower fixed-income yields and significant level of sterilized funds (NGN881.69 billion; +98.7% YTD; Effective CRR: c.47.0%).
Asset Quality Metrics Steady Even as Assets Base Expands: The bank’s management stated that c.20.0% of the loan book had been restructured (c.5.0% from the Public sector), under the forbearance given by the CBN. Further to that, no moratorium over 1 year was given. On Stage 2 loans, the bank said that only four customers accounted for c.91% of the loans in that category. They further stated that progress had been made on three of the loans to allow for the transition back to Stage 1, which should tether ECL growth going towards FY2020, barring further economic stress. Given this, we do not expect significant pressure on NPLs (H1-20: 6.8%) going towards FY2020.
CAR & Liquidity Point to Headroom for Growth: The bank’s capital adequacy ratio (H1-20: 22.9%; H1-19: 22.5%), and liquidity (H1-20: 43.2%; H1-19: 49.3%), are both within statutory minimums of 16.0% and 30.0% respectively, implying that the bank has headroom for growth.
Transition to Holdco Structure Progressing Well: The management of the bank said that the process was progressing as expected, and expected the transition to a Holdco structure would be concluded by Q1-21. The GTB Holdco would be structured along Commercial Banking, Asset Management, Pensions, and Payments. The Commercial banking part of the business will be sectioned into GTB Nigeria, GTB East Africa, GTB West Africa (Ex-Nigeria), and GTB UK. Also, the management confirmed that talks were on-going to acquire a firm that already had Asset Management and Pensions franchises. The shares of GUARANTY will be exchanged 1-for-1 for the new Holdco.
Valuation Remains Attractive: In our view, the bank’s income generating capacity will strengthen from this point, especially non-funded income. Also, while we expect Opex to remain relatively elevated, the fact that AMCON expenses have been accrued for the year, should result in some run-rate respite. We arrived at a target price of NGN31.41 relative to the market price of NGN24.30 (8th September 2020). Consequently, we place a “BUY” recommendation on the ticker.
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