GTCO Sustains High Payout Despite 2021 Earnings Power Slowdown

By Kanayo John, Imperial Assets Research

FY-2021 Performance Review

Guaranty Trust Holding Company (GTCO) Plc recently released its audited financial statements for the year-ended 31 December 2021 (FY-2021). A close analysis of the results showed that both Gross Income (GI) and Net Income (PAT) plunged by 1.63% and 13.2% to settle at ₦447.81 billion and ₦174.84 billion compared to FY ‘20 figures. We observed that the low GI y/y was due to 11.3% contraction in Interest Income (INC) amid low returns on loans and advances to customers and fixed income investment, especially in H2 ’21.

Low yield securities portfolio pressured Net Interest Income

 As noted earlier, INC fell by 11.3%y/y in FY-21, chiefly on a 50.4% y/y (Q4 21: -12.8% y/y) decline in Interest on investment securities. However, the group’s investment securities portfolio grew 15.0% y/y, most of the growth came from the CBN’s low yield on Special Bills. These bills made up 49.8% (2020: 41.9%) of its investment securities portfolio and, on our calculations, it dragged the portfolio’s average yield down by 630bps to 4.3%. However, Non-interest income (N-INC) grew by 13.4% y/y in FY-2021 to helped cushioned the INC. The growth was driven by a 39.9% surge in Fees & commissions income following the substantial rise in E-business Income.

Sticky expenses amid challenged business environment

Interest expense was somewhat sticky as it fell by 1.7% following a 53.6% fall in Interest on other borrowed funds. We imagine that this could be related to the forbearance granted by the CBN following the pandemic (these borrowings appeared to have been repriced downwards in 2020, and the rates were maintained in 2021). Notably, interest on deposits rose by 2.4% y/y, reflecting the group’s funding mix deterioration. Elsewhere, operating expenses (OPEX) grew by 11.7% y/y, mostly on regulatory (AMCON and NDIC) costs and Communications, Technological related and Administrative expenses. As such, the group’s Cost-to-Income ratio settled at 36.2% (2020: 31.9%), as efficiency fell below 5-year’s historical average levels of 35.7%. Loan loss provisions declined by 56.4% y/y following an improved outlook for the macroeconomic variables used in the Expected Credit Losses (ECL) model in the period. As a result, the group’s Cost-of-Risk declined to 0.5% (2020: 1.1%).

Bottom lines reflects pressured expenses

 In line with pressured cost heads, pre-tax profit declined by 7.0% to settle at ₦221.5 billion. Total tax expenses accumulated to ₦46.66 billion (following the increased Effect of tax rates in foreign jurisdictions and a reduction in Tax-exempt income during the year), representing 27.3% upside of FY-2020 number. Again, due to the increased pressure on tax expenses, Net income (PAT) moderated by 13.2% to ₦174.84 billion from ₦201.44 billion in FY-2020. Based on outstanding shares of 29.4 billion, our computed 12M-21 earnings per share (EPS) stands at 594kobo, 20kobo lower than GTCO’s reported 614kobo leading to a Price/Earnings Ratio (PE) of 3.87x at market price of ₦23.00 posted on Wednesday, 30th March 2022.

Asset quality continues to improve

Overall, asset quality continued to show a positive trend, as the NPL (non-performing loan) ratio declined to 6.0% in FY 21 (2020: 6.4%), although it remained above the statutory limit of 5.0%. Elsewhere, the group’s total capital adequacy ratio closed at 23.8%, 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 dividend payout ratio. The dividend yield is currently more than double the current yield on the 1-year T-bill. We expect a rebound in earnings for the group in FY-2022, supported by an improvement in treasury yields and risk asset creation.

We retain a BUY recommendation on GTCO

On a balance of factors, we have reversed our estimates on GTCO to ₦30.00 from ₦32.50. Notably, the stock price of GTCO has shed 13.0% (currently at N23.0) 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 ₦30.00 presents 30.4% 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 13.0% 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

GT Bank 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.