GTCO Remain Attractive For Investment Despite Slow Earnings Amidst High Profit Margin

By Kanayo John

Guaranty Trust Holding Company (GTCO) Plc on Monday, 05 September 2022 released its half-year audited financial statements for the period ended 30 June 2022 (6M-2022).

A close analysis of the results shows that while Gross Income (GI) expanded by 15.09% to ₦239.29 billion, Net Income (PAT) plunged by 2.34% to settle at ₦77.56 billion compared to 6M ‘22 figures.

Markedly, the GE performance was strongly bolstered by Interest Income (INC), which rose by 15.1% y/y to ₦147.20bn (61.5% of total GE) amid improved expansion in the Group’s Loans and Advances to Customers (+13.1% y/y to ₦103.14bn). Other visible contributors to the GE are Fees and Commission Income (15.9% of the GE), and Net Trading Income (9.86% of the GE).

NII bolsters by loan growth accretion 

As noted above, INC was primarily driven by expansion in the Group’s credit advances to customers. Additionally, we noticed that investment in financial instruments provided better returns in the period under review compared to numbers posted in H1 ’21. For instance, investment in government bonds, commercial papers and treasury bills grew by 27.3% y/y to settle at ₦36.18bn and represented 24.6% of total INC compared to 22.5% in H1 ’21. The improved returns on financial instruments could be attributed to expansion in yields environment following hiked in Monetary Policy Rate (MPR) in H1 ’22.



In view of the expansion in INC, cost item heads equally expanded. Notably, Interest expense rose by 38.4% y/y to ₦26.35bn, driven by a 44.6% y/y increase in Interest paid on customer deposits. Fees and Commission expenses rose significantly by 369.8% to ₦6.71bn, driven by bank charges on e-business channels and account maintenance bills. As such, Net Interest Margin (NIM) compressed by 99bps to 50.5%, compared to 51.5% achieved in H1 ‘21. Noteworthy, loan impairment charges dropped by 25.4% to ₦3.52bn, as level of credit defaulting slowdown among corporate and private customers in the post lockdown or post pandemic era.

Elsewhere, Operating expenses (OPEX) grew by 11.3% y/y to ₦99.46bn, mostly driven by regulatory fees (AMCON: 23.4% of the OPEX), and communications, technological related and administrative expenses (9.38% of OPEX). Notably, occupancy costs which capture costs of diesel, fuel, electricity, water, and ground rates spiked by 58.0% y/y to ₦3.76bn. For instance, diesel’s price (unregulated) has become a topical issue in Nigeria business environment after the pump price spiked by over 100% to settle at ₦778.56 per liter in H1 ’22. As such, the group’s Cost-to-Income ratio settled at 48.2% (H1 ‘21: 47.7%).

Bottom lines reflect pressured expenses

In line with noteworthy improvement in income heads, pre-tax profit rose by 10.95% to settle at ₦103.25 billion. Total tax expenses accumulated to ₦25.69 billion (following the increased effect of income tax and education tax rates), representing 88.3% upside of H1 ‘21 number. Notably, due to the increased pressure on tax expenses, Net income (PAT) moderated by 2.34% to settle at ₦77.56 billion from ₦79.42 billion posted in H1 ‘21. Based on outstanding shares of 29.4 billion, our computed H1 ’22 earnings per share (EPS) stands at 264kobo, 6kobo lower than GTCO’s reported 270kobo, leading to a Price/Earnings Ratio (PE) of 7.48x at market price of ₦19.70 posted on Friday, 16th Sept. 2022.

Asset quality continues to improve

Overall, asset quality continued to show a positive trend, as the NPL (non-performing loan) ratio settled at 6.0% in H1 ’22, same reported in H1 ‘21: 6.0%, although it remained above the statutory limit of 5.0%. Elsewhere, the group’s total capital adequacy ratio improved to 22.0%, higher than 21.7% in H1 ’21, and significantly higher than the Basel III minimum regulatory requirement of 15.0%.

Investment case for GTCO

Notwithstanding the decline in the group’s earnings y/y, we observed that it maintained its interim dividend payout ratio. We expect a rebound in earnings for the group in FY-2022, supported by an improvement in treasury yields and risk asset creation.

Meanwhile, the Directors of the Group (the Bank) has recommended an Interim Dividend of 30kobo per share to its shareholders. At current market price, Dividend Yield is 1.52%. Qualification date for the Dividend is 20 September 2022.

We retain a BUY recommendation on GTCO

On a balance of factors, we have reversed our estimates on GTCO to ₦28.00 from ₦30.00. Notably, the stock price of GTCO has shed 24.23% (currently at ₦19.70) from N26.00 it opened the year. Our valuation was based on mixed of DDM and FCFF with a biased weight placed on FCFF. Our target price of ₦28.00 presents 42.13% upside opportunity ahead of FY-2022. Note that our waiting period covers March/April 2023 when FY-2022 numbers and dividend announcement would have been released. In addition, after losing 24.23% year-to-date, the stock is trading at a deep discount to its peers and historical valuation. This presents an attractive entry opportunity for investors.

Accordingly, we maintain a BUY recommendation on GTCO.

GTCO Brief Profile

GTCO Plc was incorporated and licensed to provide commercial and other banking services to the Nigerian public in 1990. It commenced operations in February 1991 and has become one of the most service focused banks in Nigeria and Africa. The Bank’s principal activity remains the provision of commercial banking services to its customers, such as retail banking, granting of loans and advances, corporate finance, money market activities and related services, as well as foreign exchange operations.