GTBank Retains Lead As Most Profitable Financial Sector Stocks On Forex Gains

The scorecard of Guaranty Trust Bank for period ended December 31, 2016 was recently made available to the investing community earlier than the release date of the 2015 account in keeping with global best practice in corporate governance and its post listing obligations, enabling investors predict their investment with a degree of certainty.
The bank’s core operations backed by strong technology to deliver satisfactory service to its customers has supported its domestic and internationally operations as it remains a correspondent bank for many financial institutions like Bank of China, JP Morgan chase, Deutsche Bank, Citibank and others. These also include international agencies and networks to easy transfer and wiring of funds locally and internationally, particularly thereby boosting foreign exchange earnings that translated into huge gain as a result of Naira devaluation. This has subsequently contributed to keeping the bank head high in at a time Nigeria was neck-deep in recession, occasioning all manner of downgrades for the sovereign, sub-nationals and indeed the corporates, due to the weak and tight macro-economic indices.
The bank has sustained its track record of yearly jumbo profits, but this time, it was on the back of strong revaluation gains recorded post-Naira devaluation.
Key performance ratios for the year revealed improvements over those of the corresponding year, particularly the top and bottom-lines.
Specifically, gross earnings for the year rose 44% from N229.37bn in 2015 to N329.28bn, just as profitability level rose at a faster pace. Profit before tax was up 60% to N120bn from N75.16bn in 2015, boosted by Fx revaluation gain of N93.95bn, a significant increase over the N6.96bn recorded in the 2015 financial year. There was a marginal decrease in cost of operation for the period, following which profit margin for the period rose from 32.8% to 36.4%.
This was also despite the huge increase in loan loss provisions in the period as the bank complied fully with the directive of the Central Bank of Nigeria (CBN) as part of efforts to keep the loan books and balance sheet of Nigerian banks healthy, thereby avoiding the usual full-year shock and surprise to shareholders.
This resulted in GTBank making a huge provision of N57.08bn, significantly higher than previous year’s N8.52bn, representing an obviously unhealthy 569.95% increase. Operational expenses margin for the period dropped to 20.94%, up from 28.20% recorded in 2015.
Net assets moved up to N492.2bn from N400.67bn in the corresponding period of 2015, Earnings Per Share (EPS) for the period rose to N4.07 from N2.55 in 2015, representing 59.56% growth.
The bank’s improved earnings power for the period under review resulted in the price in 1.91x, which is lower than the 2.08x recorded in 2015. Book Value for the period stood at N16.72, up from 13.61 in 2015. The improvement in profit margin compared to corresponding period is evidence of improved cost management, despite the high provisioning that calls for more management effort in the area of credit risk, just as loan to deposit ratio of 80.27% is high on return to assets of 3.88%.
GTBank
SOURCES: COMPANY DATA & INVESTDATA RESEARCH
Investors, on the other hand, were driven by enhanced value addition as the bank’s strong numbers supported its share price, as the consistent dividend has attracted all class of investors seeking to take strategic positions and partake in the full year dividend at the end of the current financial year, to the stock.
Similarly, the book value has grown significantly in the last four years from N9.58 to N16.72. The investing community’s confidence and earnings power supported its price as valuation tools placed GTBank’s share price at N35

Technical View
GTBank1
The bank’s outstanding position in the pre-recession and in the ongoing recession season have reflected in the recent results that was boosted by its customer deposit base with high patronage by the banking public has sustained it operation.
It remains strong in the industry as a result of solidified operations and branch networking through information technology-driven products and efficient customer service delivery.
GTBank2
SOURCES: COMPANY DATA & INVESTDATA RESEARCH

Performance

The bank’s giant strides were clearly revealed in the numbers posted in the past four years which shows that it has consistently enhanced performance over the period as reflected in its profitability ratio within the review period.
Gross income during the period grew by 35.32% from N223.06 billion in 2012 to N301.85 billion, while profit after tax (PAT) rose by 14.71% to N99.44billion from N86.69 billion posted in 2012.
The profitability level has steadily grown to support share price, placing the bank among the top three in terms of profitability, asset, margin, service delivery and risk management in the industry today. Under the period of four years, the risk and cost management of the bank improved tremendously as shown in its profit margin considering the changing business environment as it slipped to 32.94% from 38,86% in 2012.
The bank’s prudent management in this harsh business climate led to enhanced shareholder value or net assets for this period. The nature and complexity of the risks in its business requires strong and robust risk management structures to provide adequate oversight at all levels.
The earnings power of the bank remained strong at N3.38, regardless of challenges confronting the industry such as the seeming over regulation, high Monetary Policy Rate, tight liquidity, falling crude oil prices, dwindling external reserve and falling Naira value at the exchange market.
The bank’s 2015 full year EPS of N3.38 was beyond analysts and market expectations at a time non-performing loan resulting from the falling oil price was expected to impact negatively on banks’ profitability at a time some operators in the industry had started posting negative or declining profit.
The bank’s total assets per share and book value per share stood at N85.78 and N14.05 respectively.
GTBank3
SOURCES: COMPANY DATA & INVESTDATA RESEARCH

Valuation

We believe that future expectations validate any projection, even as consistent growth in gross income and profitability on quarterly and yearly basis is the basis for our central focus and positive outlook for this bank stock. GTBank’s Price/Earnings Ratio stood at 5.05xs, with Price to Book Value ratio of 1.21 and Dividend Yield of 7.29%. Investors with medium and long term goals and want to preserve capital should look the way of this stock.
The pass through effects of the implantation of the Treasury Single Account (TSA) is still evident in the rising cost of borrowing and the pressure on net interest margins.
Analysts Opinion/Recommendations
The shares of GTBank is overvalued, considering its book value that narrowed the margin of safety, but its consistent dividend payout has supported share price which is likely to remain for the FY 2017 estimates. The stock is currently trading at a 45.05% discount to our fair value estimate of N35. We are mildly optimistic that despite the tight tightened the liquidity condition in the Nigerian financial system, the steep tank in oil prices poses a major threat to asset quality for most Nigerian banks as a result of their exposures to the sector and the tight currency control policy of the CBN which has weakened the earnings capacity of banks in the country, GTB has the capacity to weather the storm as it has demonstrated before now, especially with some of its investment in hard currency through its Eurobond and others. This has reflected on its fx revaluation gain.
Although we expect major headwinds, at least all through the rest of the year, we are also impressed with the continued growth of the bank’s Book Value position over the last few years. However the bank must be proactive with its Return on Equity (ROE) growth. We recommend BUY for now.

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