GTBank – High Regulatory Costs Weigh on Bottomline

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In its recently released 9M’2020 results, Guaranty Trust Bank (GTBank) reported a slower gross earnings growth relative to what was reported in H1’2020. Gross earnings in 9M’2020 grew by 2% year-on-year (YoY) from N326.14bn in 9M’2019 to N333.06bn in 9M’2020.

Net interest income increased by 10% YoY from N172.94bn in 9M’2019 to N189.74bn in 9M’2020, while non-interest income grew by 3% YoY from N101.96bn in 9M’2019 to N104.84bn in 9M’2020.

Operating income grew by 4% YoY from N270.25bn in 9M’2019 to N279.75bn in 9M’2020. Owing to a 300 basis points increase in cost-to-income ratio from 37% in 9M’2019 to 40% in 9M’2020, profit before tax dipped slightly by 2% YoY from N170.65bn in 9M’2019 to N167.35bn in 9M’2020. Profit after tax declined at a higher rate of 3% YoY (from N146.99bn to N142.28bn), due to a higher effective tax rate.

GTBank - High Regulatory Costs Weigh on Bottomline

High-Risk Environment Dampen Prospects of Bottomline Growth

On a YoY basis, GTBank’s total deposits rose by 29%, from N2.55trn in 9M’2019 to N3.30trn in 9M’2020. As noted in our previous report, the sustained liquidity glut in the financial system, induced by the policies of the monetary authorities, was accretive to fund generation by the Group. On a quarter-on-quarter basis, total deposits rose by 7% from N3.09trn as of H1’2020 to N3.30trn as of 9M’2020.

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Nonetheless, despite the rise in total deposits, GTBank’s loan book grew by 14% YoY from N1.38trn in 9M’2019 to N1.57trn in 9M’2020. We note that the growth in loan book was less than half the increase in growth of total deposits. Also, on a QoQ basis, total loans declined by 3%. The numbers reported suggests that the Group was possibly hesitant to take risks during the period.

The less-than-expected growth in loan book, despite regulatory demands, opines that lending opportunities were limited during the period. In our view, we posit that rather than extend credit facilities with a high likelihood of default, the Group invested in risk-free assets instead. Investments in financial securities rose by 13% on both YoY and QoQ basis.

Financial assets held for trading also grew by 407% and 46% on a YoY and QoQ basis, respectively.

As expected, the inability to grow loan book (as mandated by the Central Bank of Nigeria’s (CBN) 65% minimum Loan-to-Deposit (LDR) policy) resulted in higher CRR debits as the Group’s restricted deposits rose materially by 104% and 11% on a YoY and QoQ basis, respectively.

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Consequent to the factors emphasised above, interest income on loans and advances grew by 2% YoY from N224.19bn in 9M’2019 to N228.23bn in 9M’2020. On a quarter-on-quarter basis, however, interest income declined by 5% from N47.05bn in Q3’2019 to N44.52bn in Q3’2020. The quarterly decline in interest income was reflective of a combination of lower yields and decline in loan book in Q3’2020.

Cost of Fund Sustains Downward Trend

The Group’s cost of fund lowered to 1.66% in 9M’2020, from 2.54% in 9M’2019, as interest expense declined by 25% YoY from N51.25bn in 9M’2019 to N38.49bn in 9M’2020. The lower interest expense incurred during the period also reflected the composition of the Group’s total deposit base.

Notably, the portion of savings (the cheapest) deposits rose from 25% of total deposits as of 9M’2019 to 33% of total deposits as of 9M’2020. Also, the portion of term (the costliest) deposits declined from 16% as of 9M’2019 to 12% as of 9M’2020.

As a result, of a 25% YoY decline in interest expense, relative to a 4% YoY growth in interest income, net interest income grew by 10% YoY from N172.94bn in 9M’2019 to N189.74bn in 9M’2020. Meanwhile, impairment charges on loan spiked by 267% YoY from N2.76bn in 9M’2019 to N10.15bn in 9M’2020.

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The spike in loan impairment charges is attributed to elevated risk expectations induced by the COVID-19 pandemic which grounded the economy. Net interest income after impairment charge grew by 6% YoY from N170.18bn in 9M’2019 to N179.59bn in 9M’2020.

FX Trading Gains Drive Non-Interest Income

Non-interest income advanced by 3% YoY from N101.96bn in 9M’2019 to N104.84bn in 9M’2020, primarily driven by a 203% YoY increase in FX trading gains from N3.99bn in 9M’2019 to N12.10bn in 9M’2020.

The other line items that supported the growth in non-interest income include FX revaluation gains (+74% YoY from N12.43bn to N21.62bn), writeback on impairment of financial assets (+2710% YoY from N111.00mn to N2.53bn). GTBank’s net fee and commission income declined materially by 30% YoY from N46.49bn in 9M’2019 to N32.73bn in 9M’2020.

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The decline in net fee and commission income is attributed to the decrease in fees from transaction-related activities, as the COVID-19 pandemic took a toll on economic activities. GTBank’s net fee and commission, however, recorded an improvement on a QoQ basis (+19% QoQ growth), resulting from a gradual reopening of the economy.

Operating income grew by 4% YoY from N270.25bn in 9M’2019 to N279.75bn in 9M’2020, mainly driven by the 6% YoY growth in net interest income. Meanwhile, operating expense grew by 13% YoY from N99.59bn in 9M’2019 to N112.40bn in 9M’2020.

As a result of higher operating expenses incurred during the period, profit before tax declined by 2% YoY from N170.65bn in 9M’2019 to N167.35bn in 9M’2020. Profit after tax declined by 3% YoY from N146.99bn in 9M’2019 to N142.28bn in 9M’2020.

Other Information

GTBank’s Capital Adequacy Ratio (CAR) stood at 23.85% as of 9M’2020 (H1’2020: 22.93%, FY’2019: 22.50%). The Group’s CAR stood above 15% regulatory threshold during the period.

Non-Performing Loan (NPL) ratio improved to 6.51% (H1’2020: 6.80%, FY’2019: 6.50%). The Group’s NPL ratio was above the 5% regulatory threshold during the period.

Read Also:  GTBank Notifies of Delay in the Submission of H1 2020 Financial Statements

The Group’s liquidity ratio lowered to 38.78% as of 9M’2020, from 43.15% as of H1’2020 and 49.30% as of 9M’2020. Nonetheless, the Group’s liquidity ratio was above the 30% regulatory threshold.

Update on Restructuring into a HoldCo.

The Group recently announced its plan to reorganise the bank to a financial holding company, which will be implemented through a scheme of arrangement between the bank and its shareholders.

According to the information provided by GTBank, the issued shares in the bank will be exchanged on a one-for-one basis in the financial holding company. The bank’s existing Global Depositary Receipts (GDRs) will also be exchanged on a one-on-one basis for new GDRs to be issued by the financial holding company.

The rationale for the business reorganisation resulted from a comprehensive strategic evaluation of the operating environment of the Nigerian banking sector in the near term. The Board expects to drive future growth by exploring other markets and industries.

A meeting with the shareholders was ordered by the Federal High Court, concerning the business reorganisation. Although there is no official statement from the GTBank’s Board yet, it was reported that shareholders approved the decision.

Historical Income Statement

Guaranty Trust Bank GTBank Brandspurng - High Regulatory Costs Weigh on Bottomline
Source: Company Accounts, WSTC Research

Outlook

We note the significant rise in GTBank’s restricted deposits as of 9M’2020. We also note the persistent decline in its liquidity ratio, which suggests that the liquidity of the bank is under pressure.

Thus, we think that GTBank is careful in creating risk assets, given the regulatory challenge it is faced with, in combination with a weak macroeconomic environment. In our view, we believe that the recent policy decision by the CBN to issue special bills could improve the liquidity position of the Group.

Due to the lack of clarity around several considerations, we are unable to precisely estimate the potential impact. However, on an overall assessment, we posit that the idea behind the CBN’s special bills is to refund the excess CRR to banks, to shore up the liquidity base of banks which would facilitate increased lending activities to the private sector. We, therefore, expect to see an improvement in loan growth going forward.

Also, we think that as the economy gradually exits recession, the heightened risk associated with businesses could lower; thus, encouraging financial institutions to increase lending activities.

Given the outcome of the Group’s Q3’2020 operating performance and our expectations for Q4’2020, we further lowered our FY’2020 EPS forecast from N6.71 to N6.42. We also lowered our growth expectations for GTBank in the near to medium term, owing to heightened regulatory risk and weak macroeconomic fundamentals. However, we have not factored in the possible value accretion that the Group’s business reorganisation into a financial Holdco could bring.

We estimate a fair value of N50.55 for the stock, which implies a justified P/E and P/B of 7.79x and 1.78x, respectively. Currently, the stock trades at a forward P/E of 5.16x. In our view, we think that the stock is significantly undervalued.

From a fundamental point of view, we believe that the stock is worth more than the current market price suggests. Also, the stock offers an 8% dividend yield, which is significantly higher than what is obtainable in the fixed income markets. For context, the yield on the 10-year FGN Bond is c.4%.

Therefore, we maintain our BUY rating.

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