November 2, 2023/United Capital Research

Guaranty Trust Holding Company Plc (GTCO or the Bank), in its 9M-2023 results, recorded a 133.4% y/y top-line growth as Gross Earnings (GE) settled at N850.3bn compared to the N364.3bn recorded in the corresponding period in 2022. This increase was on the back of sustained expansion in the bank’s non-interest income, as well as interest income growth. Overall, profitability improved as both Profit Before Tax (PBT) and Profit After Tax (PAT) grew by over 150.0% y/y. Details of our review of the Bank’s 9M-2023 earnings and highlight of our FY-2023 expectations are as follows

Improvement in Operating Environment
GTCO reported a 61.1% y/y growth in its interest income from N232.5bn in 9M-2022 to N374.6bn in 9M-2023 following Nigeria’s elevated interest rate environment. Taking a deeper dive, we noticed that interest earned on loans and advances to customers accounted for the bulk (56.7%) of the interest income generated. This increased by 32.8% y/y from N160.0bn in 9M-2022 to N212.3bn in 9M-2023 following growth in the Bank’s loan book. Additionally, interest earned on investment securities, which accounts for 23.3% of the lump sum, climbed by 210.8% y/y due to the higher rates in the fixed-income market during the period under review.

On the flip side, we observed a 79.9% y/y climb in interest expense from N42.8bn in 9M-2022 to N77.0bn in 9M-2023. This is due to the growth in interest-bearing assets amid rising interest rates. GTCO expended a total of N69.6bn (accounting for 90.4%) as interest incurred on customer deposits. Notably, the Bank’s deposits from customers grew by 39.3% y/y (from the N4.5tn recorded in Dec-2022 to settle at N6.2tn in 9M-2023) in the period under review. Despite the surge in interest expenses, GTCO’s Net Interest Income increased by 56.9% y/y from N189.7bn to N297.5bn.

For non-interest income, GTCO recorded an uptick of 279.1% y/y from N123.2bn in 9M-2022 to N466.9bn in 9M-2023. A further inspection shows that the uptick was driven by the 4621.0% y/y expansion in foreign exchange revaluation gains from the previous loss position of N7.4bn to N334.4bn in 9M-2023. These gains can be attributed to the recent unification of the foreign exchange windows, which saw the Naira depreciate significantly against the Dollar. GTCO benefitted from this policy as the value of its foreign-dominated instruments/books quoted in Naira terms appreciated in tandem.

On operational efficiency, GTCO recorded improved operating activities despite a challenging working environment from sustained inflationary pressures and macroeconomic woes. The Bank’s Operating Expenses (OPEX) grew by 31.0% y/y from N139.4bn in 9M-2022 to N182.7bn in 9M-2023, buoyed by increases in AMCON expenses, technological-related expenses, amongst others. However, GTCO’s operating income was sufficient to offset the increases in its OPEX, as operating income was up by 144.3% y/y to settle at N764.5bn in 9M-2023 (previously, N312.9bn in 9M-2022). Consequently, the Bank’s Cost-to-Income Ratio (CIR) fell by 20.7% from 44.6% in 9M-2022 to 23.9% in the period under review.

In all, GTCO recorded a 155.2% y/y growth in PBT from N169.7bn in 9M-2022 to N433.2bn in 9M-2023. Despite the 67.1% y/y climb in taxes paid for the period, the bank remained profitable as PAT settled at N367.4bn, up 181.9% y/y, compared to the N130.3bn recorded in 9M-2022. As a result, the trailing 12-month Return on Average Equity (ROAE) climbed to 38.1% in 9M-2023 (previously 20.0% in 9M-2022).

Resilient Balance Sheet
Total Assets expanded by 33.6% y/y from N6.4tn in FY-2022 to N8.6tn in the period under review. This is on the back of the 71.6% y/y increase in investment securities to N2.1tn, arising from the 50.8% y/y surge in securities held at amortised costs. Also, cash and bank balances improved by 42.5% from N1.6tn in 9M-2022 to N2.3tn in 9M-2023. Additionally, GTCO’s loan book grew by 17.7% y/y from N1.9tn recorded as of Dec-2022 to N2.2tn in Sep-2023, while total deposit increased by 37.9% y/y from N 4.6tn in Dec-2022 to N6.4tn in Sep-2023. As a result, the Bank’s Loan-to-Deposit Ratio (LDR) shrank from 40.9% to 38.1%, failing to meet the Central Bank’s regulatory minimum of 65%. In terms of asset quality, the Non-Performing Loan (NPL) ratio improved to 3.8% in 9M-2023 from 5.2% in FY-2022. However, the bank’s Cost of Risk (COR) rose to 4.1% in 9M-2023 from 0.6% in FY-2022 owing to management’s conservative stance on provisioning in the face of macroeconomic fragilities. Overall, GTCO’s Capital Adequacy Ratio (CAR) settled well above the regulatory limit at 25.1%.
 
Outlook: We Maintain a Positive Bias
Looking forward, we expect GTCO’s solid performance to be sustained. This is based on earnings stability, operational efficiency, prudent risk management strategy, robust profitability, dividend consistency and a stable corporate governance outlook. We expect GTCO to sustain its solid Net Interest Margin (NIM) positioning due to its huge and growing interest-bearing assets amid the elevated interest rate environment. Also, we expect the Bank’s outstanding CIR ratio to continue to support bottom-line growth despite the challenging macroeconomic and operating environment. Additionally, we expect a sustained increase in the Bank’s non-interest income arising from potential FX gains. Hence, this will ensure a profitable position for GTCO.

Lastly, Habari Pay, the fintech arm of Guaranty Trust Holding Company (GTCO), posted a 261.6% y/y profit-after-tax of N2.1b in 9M-2023 (previously, N590.0mn). This growth shows promising adoption of the Bank’s digital payments business as it looks to bolster its hold on the fintech sector. A breakdown of GTCO’s operating segments shows that retail banking is its second-biggest revenue-generating segment.

That said, we believe Guaranty Trust Holding Company Plc will continue leveraging the strengths within its growing financial services ecosystem to improve its products and service offerings, enhance customer experience and maximise shareholders’ value.  As a result, we project a N42.0/share Target Price (TP) for FY-2023, with an 18.6% upside from the current price of N35.40. Thus, we maintain a BUY rating on the ticker.