September 9, 2020/United Capital Report
…Restructuring into a HoldCo
Earlier, Guaranty Trust Bank (“GUARANTY” or “The Bank”) released its H1-2020 results, showing a 1.5%y/y increase in Gross Earnings (GE) to N225.1bn, despite pressure on interest and non-interest income amid extreme regulatory environment and global public health crisis. However, PBT and PAT dipped by 5% apiece due to sharp increase in OPEX and impairment charges. The future looks interesting for the Bank following its recent guidance to restructure into a HoldCo.
Competitive margins despite weaker assets yield: GUARANTY’s GE rose 1.5% y/y to N225.5bn in H2-2020 notwithstanding obvious challenges in the policy and macro environment. Surprisingly, interest income came in 3.2% stronger, settling at N153.7bn. An evaluation of the driver of interest income revealed that this was driven by an increase in the volume of loans disbursed and a surge in financial investment securities, which counter-poised the impact of lower asset yields. However, Non-interest income fell 2.0% to N71.4%, as net fees & commission income tumbled 34.0% to N22.3bn despite a 43.5% surge in FX trading gains to N7.7bn.
Clearly, GUARANTY sustained its best in class NIM performance, despite lower asset yields (down 6bps) as improvement in cost of fund more than offset pressure on yields, declining to 1.5% (vs. 2.5% prior period). Notably, the sharp drop in fee & commission income is traceable to regulatory changes following the apex bank’s decision to slash charges. Thus, E-banking income fell 32.2% to N4.8bn, bank charges slumped 28.9% to N3.1bn and corporate finance fees tumbled 76.5% to N1.2bn. Still, COVID-19 induced lockdown was culpable amid reduced transaction volumes. As observed across the sector, impairment charges jumped 210.0% to N6.8bn, certainly triggered by increased probability of default due macroeconomic weaknesses.
Macro challenges weigh on OPEX: GUARANY’s Cost to Income Ratio (CIR) came in at 43.2% following a 19.2% jump in OPEX to N83.3bn. Management attributed this to VAT and naira devaluation induced inflation, increased regulatory cost (AMCON & NDIC due to a surge in total assets & deposits), as well as COVID-19 donations. Accordingly, PBT and PAT slumped 5.0% lower to N109.7bn and N94.3bn respectively. This weighed on net margins and profitability ratios as PAT margin, annualized ROA and ROE moderated to 41.9%, 4.6% and 26.8% respectively.
Retail, Oil & Gas and General commerce loans, weigh on Asset Quality: Balance sheet size expanded 20.0% to N4.5tn driven by customer deposits (+19.0% to N3.0tn), as well as other liabilities and derivative assets. Deposits growth was attributed to a surge in retail customer base from 18.5million in FY-2019 to 19.8million, now accounting for 50% of total deposits. However, loan book stood at N1.6tn up 8.2% amid COVID-19 induced concerns. As such, cash balance settled at N758.8bn, up 28.0%ytd. NPL rose 3bps to 6.8% amid proactive measures to contain the negative impact of COVID-19 on risk assets, especially Individuals, Oil & Gas, SMEs, General Commerce related loans. Some of the measure taken included rate reduction and insurance on retail loans, and deferral on SME loans, we understand that a significant portion of upstream oil & gas sector loans have been hedged against price movements. Overall, capital adequacy ratio remained well above regulatory limit at 22.9%.
Impact of proposed HoldCo structure to kick in from 2021, BUY rating retained: We retain our BUY rating on GUARANTY at a target price of N31.9/share. This is on the basis of the historical operational efficiency, balance sheet optimization, sound risk management strategy, robust profitability and dividend consistent. We expect GUARANTY to sustain its solid NIM and COF positioning due its huge and growing retail customer deposit base. Also, bottom-line will continue to be supported by the bank’s outstanding CIR which is expected to stay within the 40% threshold by FY-2020.
However, we are keenly following the recent decision of the Bank to now adopt a Holding company structure, ahead of the completion of its CEO’s regulatory 10-year term. We imagine that this will herald a new era for the business, especially what this will mean for leadership of the business, especially for GTBank Nigeria, which seemed to be quite topical. According to management, the structure will include the Bank (GTBank Nigeria), Banking Subsidiaries (GTBank UK, West & East Africa), Asset management & PFAs as well as the FinTech/Payment service business. Management appears excited about this. Yet, impact will not kick-in until Q1-2021.
In terms of market valuation, PE and PB ratios came in at 4.1x and 1.0x, which is well below 3year historical averages of 5.8x and 1.7x, presenting an attractive entry point at current price ahead of FY-2020 earnings and dividend declaration. We expect the Bank to maintain a DPS of N2.5/share. Our TP revision to N31.9 from the previous N41.7 reflects increased country risk premium due to the currency market concerns and the coronavirus pandemic. Compare to current price of N24.3 this continue to portent a 31.3% upside.