GTBank: Riding On The Wings Of Huge Debt-Equity, Positive Investor Sentiments

COY: Guaranty Trust Bank Plc
Rating: Hold
Current Market Price: N47.30
Fair Value: N37.11
By: Jeariogbe Segun,
Independent Analyst @ Tradelines DotBiz Inv. Ltd

Key Financial Tickers
• The management of Guaranty Trust Bank recently reported a final cash dividend of N2.40k for the 2017 full-year financial activities. This, added the previously paid interim cash dividend of N0.30k, brings the total dividend for the year to N2.70.
• The total amount earned per unit share is N5.79, which translates to a payout ratio of 46.61%
• Meanwhile, the said dividend is 5.71% of the current market price as at the released date.
• Please note that the N5.79k earnings per share is 12.25% of the current market price, which means Earnings Yield is 12.25%.
• Qualification date for the dividend is Tuesday, March 27, 2018, which means that the shareholders’ register will be closed on Wednesday, March 28, 2018.
• Payment date for the dividend is Tuesday, April 10, 2018, while the Annual General Meeting where it would be approved holds at Oriental Hotel, 3 Lekki Road, Victoria Island, Lagos State, on Tuesday, 10th April, 2018 at 10 am.

Corporate Summary
Guaranty Trust Bank Plc is engaged in the provision of commercial banking services such as retail banking, granting of loans and advances, corporate finance, money market activities and related services, as well as foreign exchange operations. The Company operates through five segments: Corporate banking, which incorporates current accounts, deposits, overdrafts, loans and other credit facilities, foreign currency and derivative products offered corporate customers and blue chips; Commercial banking, Retail banking, SME banking, and Public Sector.
Company’s Figures
Comparing the released statistics for the year ended December 31, 2017 with the corresponding year-2016, the followings can be established;
• Gross Earnings grew marginally by 1.11% from N414.61 billion to N419.22 billion
• Interest Income grew by 24.70% to N327.33 billion from N262.49 billion, while Interest Expense stood above the comparable year by 20.23%
• Profit before Tax and Profit after Tax respectively increased by 21.26% and 28.87% while Total Comprehensive income

Though, Guaranty Trust Bank’s beta value is below industry average at 1.04, it means that its share price is theoretically more volatile than the market. Meanwhile, judging by the industry average, equity holders’ risk is averagely on the high side, because the long-term debt of the financial institution is 61.59% of its equity.

Profitability Ratios
Interest Expense to Gross Earnings is currently 19.24%, slightly above the 16.18% estimated in the similar period of 2016. Profit before and after Tax Margin are 47.76% and 40.66% respectively. Return on Average Equity is 27.27%, slightly above the 26.20% achieved in 2016.

Efficiency Ratios
In our opinion, Gross Earnings to Total Assets is fair at 12.51% although stemming down from the previously estimated 13.30%. Similarly Gross Earnings to Equity reduced from 82.12% to 67.06%. To ascertain the ratio of assets financed by equity, we have tested the bank’s equity multiplier. Our findings revealed that assets are funded more with debt than equity. Nevertheless, considering the profitability of the business, it should be assumed that the debt will assist in fueling expected growth in profits.

Investment Ratios/Dividend

The amount earned per unit is estimated at N5.79, a 28.87% appreciation over the 2016 earnings. Due to the outstanding appreciation in its share price shortly before the release of its financial statistics, GTB’s Earnings Yield of 12.25%. This is below the 17.63% achieved in the previous year. P/E Ratio reduced from 5.67x to 8.17x, an indication that investors have rightly valued its share price even before the release of the result. The Book Value although an appreciation from N17.16 of last year, is low at N21.24, just as came below our estimated intrinsic value of N37.11 per share.

QoQ Comparison

Trying to establish the QoQ growth pattern of Guaranty Trust Bank’s performance, we have tested the growth in the released financials through 2017. From a comparison, we can reliably concluded that the second quarter is always a bullish period for the bank. This could fairly explain why it normally rewards investors with interim dividend during this period. We also discovered a reduced momentum in the income statement over the year.

Our attempt to place a fair value on Guaranty Trust Bank took us through several valuation methods after which we settled for the constant perpetual dividend growth rate. We do not expect galloping growth in dividend since this has experienced appreciable growth in few years prior, so we make use of 2.54% as our growth rate. We estimate five-year dividend growth rate at 12.70, and we make use of the average which is same as 2.54. We discounted with 10% considering the dwindling nature of the 91-days T-bills rate as impacted by the reducing inflation rate. On the strength of this, we have placed a fair value of N37.11 on the share price of Guaranty Trust Bank Plc.

Our findings have revealed that the share price of Guaranty Trust Bank is overvalued at the current market price, hence the risk of positioning in its shares is fairly high. Nevertheless, an upward performance on the side of the financial institution, especially in the three months financial performance (usually released on the last trading week of April) will go a long way in supporting the current share price. Nevertheless, we have rated a Hold for Guaranty Trust Bank. In our opinion, until financials supports, we do not see any astronomic growth on the share price of Guaranty Trust Bank.