November 18, 2024/Cordros Report
The financial performance of Guaranty Trust Holding Company Plc (GTCO) in 9M-24 was impressive, with the HoldCo’s earnings crossing NGN1.00 trillion mark. The performance was driven by the strong growth across the group’s core and non-core income lines, reflective of the high interest rate environment and foreign exchange gains. Subsequently, we increase our target price by 23.7% to NGN72.85/s (previously: NGN58.88/s) and maintain our “BUY” rating. The increase in our TP is underpinned by our expectation that the Holdco will maintain earnings expansion in 2024E with continued support from the (1) elevated interest rate in the environment, (2) LCY depreciation-induced gains and (3) strong cost management. We cite regulatory pressures and weak macro story pose as downside risks to our estimates. We project a final DPS of NGN4.00 in 2024E, translating to a dividend yield of 7.1%. Our model suggests the stock is currently trading at 2024E P/E and P/B estimates of 1.6x and 0.7x, respectively.
Core and Non-Core Operations to Boost Earnings Expansion: We expect GTCO to see out the rest of the year positively, still reeling from the impact of the high interest rate environment on the Holdco’s earning assets. Specifically, we forecast GTCO’s gross earnings to remain sturdy (+90.7% y/y | 2023FY: +120.0% y/y), underpinned by broad based increases across the group’s funded (+149.5% y/y) and non-funded (+39.8% y/y) income lines. On funded income, we estimate an 86.2% y/y growth in investment securities and loan growth of 26.6% y/y, after accounting for the effect of naira devaluation on the group’s loan book. We expect the Holdco to grow loans cautiously due to the uncertain macroeconomic landscape. For non-funded income, we expect higher income from net fees and commission (+81.3% y/y) and other sources – revaluation gains on investment securities, FX trading and earnings from the non-banking verticals (PFA & assets management) – to contribute 39.3% to 2024E gross earnings. All told, we project improved EPS (+139.9% y/y to NGN45.75) in 2024E, driven by continued cost discipline (2024E CIR: 19.0% | 9M-24: 19.5% | 2023FY: 29.1%) and leverage of the HoldCo’s synergies.
Still the Most Efficient Lender: GTCO remains a leader in the banking sector in terms of cost controls. Remarkably, the HoldCo recorded a decline in impairment charges (-29.0% y/y) in 9M-24 despite the weak macro story. Also, GTCO recorded the lowest CIR in 9M-24 among peers (19.5% | Tier-1 average: 52.3%), and we foresee sustenance in 2024E. Thus, positioning the Holdco as the country’s most effective lender. We believe the group’s strong asset quality, well-structured balance sheet, and low cost of risk (H1-24: 1.6% | 2023FY: 4.5%) positions GTCO for sustained profitability and long-term growth.
Valuation: Our year end target price is NGN72.85/s, derived from a blend of the Dividend Discount Model (60.0%), Gordon Growth Model (30.0%), relative P/E (5.0%) and relative P/B (5.0%) valuation methods. Assuming a 31.7% CoE and a forecasted payout ratio of 10.9%, our DDM FV amounted to NGN73.15/s. For GGM, we maintained CoE at 31.7% and utilised an average RoE of 25.8%, deriving a FV of NGN80.29/s. On relative P/E, we utilised the tier-1 forward average P/E of 1.4x and applied it to our 2024E EPS estimate of NGN45.75/s to derive a FV of NGN61.77/s. Lastly, for relative P/B, we estimated forward book value per share of NGN102.09/s – tier 1 peer average P/B of 0.4x – and derived a fair value estimate of NGN35.73s.
