GTBANK PLC. GTBANK: the CRR hike, growth in deposit base. MorganCapital Research. Investment Summary & Highlight. April 28, 2014

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1 leading the Global Investment Path to Africa TM Stock Rating HOLD Industry View In-Line April 28, 2014 GTBANK PLC EQUITY NIGERIA FINANCIAL SERVICES Investment Summary & Highlight GTBANK: the CRR hike, growth in deposit base and the rising cost of fund- a new threat in the mix? Q1-2014: High cost of funds impairs strong net income growth. Revenue & Net income improve ZENITHBANK: by CRR, 6% clog to and growth or 2% respectively YoY. GTBank (or the Bank ) on Wednesday 16 th April 2014 released its unaudited Q result. Gross earnings rose by 6% to N67.57 billion ($412.06M) from N63.86billion ($389.41M) While net income rose by 2% to N23.11billion ($140.92M) from N22.56billion ($137.54M) YoY Interest Income grew by 7% YoY while Interest expense widened by 17% over the same period. We adduce the growth in interest expense to the reactive deposit mobilization strategy of the Bank, particularly from retail depositors, following the hike in CRR for public sector deposits to 75% from 50% in the first MPC meeting of 2014 in January. Net Interest Income consequently grew at a much slower pace of 4%, impaired by the rising cost of fund. Loan loss expenses declined by 14% to N1.27billion ($7.77M) from N1.48million ($9.03M) YoY, the resurgence of the loan loss expenses in the books of the Bank is an implication of the growing loan book (loan book grew by 29% between FY 2013 & FY 2014), yet another reactive strategy to mitigate the impact of the CRR hike on interest income. This has also interestingly refocused Banks in Nigeria to their core function of credit extension to the real sector. Investment and other Operating income managed a 1% growth over the review period while operating expenses widened by 10% over the same period. Pretax profit was down by 2% to N28.01billion ($170.77M) from N28.49billion ($17.72M) YoY while net income rose by 2% to N23.11billion ($140.91M) from N22.55billion ($137.54M) triggered by the 18% reduction in tax provision. Effective tax rate settled at 17.48% down from 20.83% year on year. African Frontier Market LEAD ANALYST Chuks Anyanwu ChuksA@morgancapitalgroup.com Biodun Salaudeen Bioduns@morgancapitalgroup.com REGULATORY COMPLIANCE Taiwo Balogun compliance@morgancapitalgroup.com MD/CEO Ayoleke O Adu FCS, CFA ceo@morgancapitalgroup.com Bloomberg Ticker: GUARANTY: NL NSE Symbol: GUARANTY Listed on the Nigerian Stock Exchange Key Cost Ratios of fund. & Statistics Current Stock Price: N27.20 Fair Value: N27.45 Outlook: NEUTRAL Market Capitalization: $4.90B Year End: December Price-to-Earnings (PE) 2013Trailing: 8.58X 2014Forecast: 7.43X 2015Forecast: 6.76X Earnings-per-Share (EPS) Current: (FY 2012): N Forecast: N Forecast: N4.02 Dividend-per-Share: N1.83 Return-on-Equity: 27.78% Return-on-Asset: 4.39% Outstanding Shares (m n) 29,431 Year-to-Date: 0.90% Latest Result FY 2013 Q a glance N (m n) N (m n) % FY FY Gross Earnings 67,577 63, PBT 28,006 28, PAT 23,110 22, EPS 0.81K 0.80K 2.00

2 N'000 N'Million % % 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Year Net Interest Income Margin PBT Margin PAT Margin Quarter on Quarter Performance 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - Q1 Q2 Q3 Q4 Year Revenue PBT PAT GTBank comparative profitability Margins for FY 2013 & FY 2013 GTBank Quarterly performance for FY ,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 REVENUE PBT PAT 10,000,000 0 Q Q GTBank Quarterly comparative performance for Q & Q Quarterly performance Analysis (A review of the FY 2013) The Bank reported its strongest revenue performance in the first quarter, where it recorded N63.57billion. The third quarter was the weakest in revenue performance, where the Bank recorded N57.79billion. The hike in the Cash Reserve Ratio for public sector deposit from 12% to 50% towards the end of the second quarter constrained the Bank s ability to earn interest income and accounts for the decline in revenue in the third quarter. The rebound in the fourth quarter which saw the Bank s revenue climb back to the second quarter level at N60.76billion is impressive and shows a sound reactive strategy to curtail the effect of the CRR hike on interest earnings. The aggressive deposit mobilization drive between September and December 2013, which saw the total deposit base of the Bank rise by 12% between the period ( 23% YoY) and total loans and advances rising by 9% (29% YoY), were major boosts for interest income in the fourth quarter. Interest income was strongest in the fourth quarter, settling at N48.41billion. However, one of the pitfalls of the aggressive growth in deposit base, particularly from the retail space is the growth in interest expense. The Bank clearly recorded some growth in its savings account deposits which attracts more interest expense than checking account deposit. Interest expense was consequently at its highest level in the fourth quarter at N13.43billion, up by 16.2% from N11.55billion in the third quarter. Operating expenses rose by 7% to N21.20billion from N19.65billion between the third quarter and the fourth quarter. The sudden jump in operating expenses is adduced to the added benefit to staff (bonuses) paid at year end. Profit Before Tax declined by 3% to N24.22billion from N25.00billion between the third quarter and the fourth quarter, recording its lowest pretax profit performance in the fourth quarter. Pretax profit was at its highest level in the second quarter where the bank recorded N28.87billion in pretax profit. PBT margin was 45% in the first quarter, 48% in the second MorganCapital quarter, Research declined to 43% in the third quarter and declined further to 40% in the fourth quarter.

3 3 Overall, we saw a stronger performance in the fourth quarter compared with the third quarter and this is impressive considering that the new policy was already in effect before the commencement of both quarters. Obviously, the Bank adopted an aggressive retail focused strategy which minimized the negative impact of the policy on its interest income generating capacity. COMPARATIVE METRICS OF TWO FINANCIAL INSTITUTIONS RATIOS & VARIABLES GTBANK FY 2013 ZENITH BANK FY 2013 GROSS EARNINGS GROWTH 9% 14% PBT GROWTH (5YR CAGR) 31% 31% NET INTEREST INCOME MARGIN 56% 54% PBT MARGIN 44% 31% GROSS EARNINGS/EQUITY (X) EQUITY/TOTAL ASSETS 16% 16% TOTAL LOANS/ TOTAL ASSETS 48% 40% OPERATING EXPENSES/ GROSS EARNINGS 34% 42% INTEREST EXPENSE/INTEREST INCOME 26% 27% ROE 27% 19% ROA 4% 3% PRICE/BOOK-VALUE PER SHARE PRICE/ EARNINGS RATIO (X) MARKET CAPITALIZATION($'m) 4,905 4,499 Stock Price is as at 31 st of March 2014 for the P/E & P/BV computation, while the market capitalization was computed using the price as at 24 th April 2014 Sector Overview Monetary policy tightening executed by the retention of the key bench mark rate at 12%, hike in the cash reserve ratio for public sector deposits from 12% to 50% and then to the current 75%, has ensured that the Nigerian banking sector has been the most volatile sector in the Nigerian equities market in the last 6months. When the suspended Central Bank governor Sanusi Lamido Sanusi made the announcement to increase the CRR for public sector deposit to 50% in the second quarter of 2013, the effect of the hike in the interest income generating capacity of banks was very clear for all to see, (click this link to read our forecast of the impact of the CRR hike as at November as the third quarter earnings season saw a significant decline in the revenue (quarter on quarter) of most banks. This situation was further heightened by the sluggish growth in the loan books of most of the banks, averaging 21% (for big five banks) for the period ended September The Nigerian banking sector index has lost 4% September 2013 to date. The CRR hike was a screaming wakeup call for the banks to re-examine their apparent unhealthy exposure to public sector deposit and refocus their strategy towards the retail space and develop more banking products to reach out more to the huge unbanked population which is more in line with their core function of financial intermediation. Following the impact of the hike in CRR of public sector deposit to 50% on the performance of the banks and the tough monetary policy stance of the Suspended CBN governor which saw the MPC further hike the CRR to 75% in the first MPC meeting of 2014, the negative investor sentiment for the banking sector worsened and banking stocks continued its downward trend. The banking index has lost 10% year to date.

4 4 On the 20 th of February 2014, the CBN governor Sanusi Lamido Sanusi was suspended on alleged corruption charges and the deputy governor, economic policy, Dr Sarah Alade was mandated to step in as the acting CBN governor to see out the tenure of her former boss, which is expected to end in July The current Managing Director of Zenith Bank Mr. Godwin Emefiele was also appointed as the substantive replacement for Sanusi when his tenure eventually comes to an end in July Matters Arising Following the ensuing drama, Investors (especially the foreign portfolio managers) who controls over 50% of the total Nigerian equities market, were worried and the questions begging for answers includes: 1. Will the new CBN governor pursue a tough monetary policy stance like his predecessor did? 2. Will there be a policy summersault on CRR for public and private sector deposits from 75% and 15% respectively? 3. What is the stance of the new governor on inflation particularly with the forth coming general election and associated increased spending, which can spike inflationary trends? 4. Will the new CBN governor defend the Naira to ensure exchange rate stability? 5. Will the new CBN governor pursue a policy to devalue the Naira? Our Opinion on the sector We have watched with keen interest as the events building up to the suspension of governor Sanusi and the appointment and ratification of Godwin Emefiele by the President and the House of Assembly as the substantive governor designate come July We have also watched the trend of monetary policy tightening by the suspended CBN governor and the impact it has had on the economy as well as exchange rate stability and inflation. Considering the objectives he set out to achieve, we think that his policies have achieved the desired results especially his stout defense of the Naira against the Dollar, which has seen a regime of exchange rate stability in the last 5years. We do not expect any further tightening in the short to medium term (till the end of 2014) and we think that there is a higher possibility of a reduction in the CRR to 50% before the end of 2014 than an increase to 100% and this may not necessarily be for compelling reasons. We expect inflation at between 7% and 9% before the end of the year, due to the expected loosening in monetary policy and the expected increase in spending as a result of the upcoming general elections. We therefore expect that the banking sector (especially for the top-tier and upper-middle tier banks) will close the year marginally stronger than it started it. Earnings Projection (FY 2014) Our FY 2014 gross earnings estimate for GT Bank is N279.06billion ($1.70B) which translates to a 15% improvement relative to FY 2013, while our net income estimate is N107.94billion ($658.22M) and equates to 20.00% improvement relative to FY This yields an EPS of N3.66 and a forward P/E of 6.69X (based on the price at report date). The tight monetary policy regime of the suspended CBN governor Sanusi Lamido Sanusi which has seen the bench mark MPR hiked and retained at 12% within the last 5years and the CRR for public sector deposit increased from 12% to 50% and then to 75% also within the last 5years has proven to be the catalyst for the Bank to refocus its strategy towards the retail space. This shows in the strong growth recorded in the Bank s total deposit base which grew by 23% against a 10% growth recorded in FY 2012.

5 5 5 Year Deposit Growth Rate of GTB % % 35.7% % 44.7% Aggressive growth in deposit YoY, up by 23% between FY 2012 & FY 2013 We expect the aggressive drive for deposit growth to continue (especially retail deposit) going forward, considering that it has provided a soft landing for banks in the midst of the biting effect of the CRR hike in public sector deposit. Our estimated total deposit for FY 2014 is N1.803trillion, a 25% rise from the FY 2013 position. The Bank s loan loss provision spiked by 291% to N2.88billion from N738million YoY (between FY 2012 & FY 2013), but total loan loss expenses in absolute terms only accounted for about 0.3% of the total loans and advances, which in our opinion indicates a strong risk assessment framework. The Bank s total loan book rose by 29% YoY to N1.008trillion from N783billion (between FY 2012 and FY 2013). We expect this growth trend to also continue as the bank seeks to exploit other opportunities in the wider economy through safe credit extension. Our estimated loan book for FY 2014 is N1.262trillion, (70% of the total deposit), representing a 25% growth from FY Year Loan/Deposit for GTBank 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 82.5% 77.9% 69.3% 66.9% 69.9% DISCLOS Loans / Deposit ratio rebounded in 2013 as the bank sort to boost interest income following the CRR hike

6 6 The Bank s shareholders fund has managed a 12% growth (CAGR) over the last 5 fiscal years. Our estimate book value for FY 2014 is N373.82billion, a 12.2% rise from the value as at FY This yields a BVPS of N12.70 up from N11.29 in FY Valuation & Valuation Analysis The stock of GT Bank is currently trading at around our fair value estimate of N27.45, with a 12month investment horizon. Our fair value computation is based on our financial performance expectation for FY Our dividend estimate is N1.83 and amounts to a 50% payout ratio and a 7% dividend yield from our fair value. Our fair value for GT Bank shares was calculated using the Dividend Discount Model comprising our expected dividend estimate for the company and a MorganCapital customized tweak to adjust for the risk of investing in the Nigerian Financial Sector. Our Required Rate of Return (RROR) factors in a risk premium of 7% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return. Investment Conclusion A fairly valued stock based on our research, with focus on our FY 2014 estimates. The CRR hike was a catalyst, as we saw a marked improvement between the Q and Q The strategy of the Bank to grow its retail deposit base and loan book yielded a positive result in the Fourth quarter. This is a more sustainable model and has raised the immunity of the bank to subsequent hikes in CRR for public sector deposit. The Bank s focus on efficient cost management which has seen it maintain the lowest cost to income ratio was also instrumental to the performance of the Bank. However, the rising cost of fund which saw interest expenses spike by 22% and the resurgence of loan loss provision which widened by 291% (between FY 2012 & FY 2013) poses a major downside threat to the Bank s performance. The Bank needs to focus on creating better credit with a protective risk assessment framework to ensure that the growth in its loan book does not automatically trigger a further spike in loan loss provision. The Bank needs to also focus on new product development to attract the increasingly competitive retail deposit, especially with the possibility that COT charges may be cancelled from the revenue stream of banks soon. We place a HOLD rating on the shares of the Bank, which is currently trading at our fair value with focus on FY Our recommended entry price is N22.37.

7 7 GTBANK (F) 2015(F) N '000 N '000 N '000 N '000 N '000 GROSS EARNINGS 188, , , , ,754 INTEREST INCOME 130, , , , ,697 INTEREST EXPENSES [28,459] 39,609 48,444 57,164 66,310 OPERATING EXPENSES [70,645] 78,098 82,419 85,716 90,859 PROFIT B/F TAX 65, , , , ,653 TAX [15,709] 16,341 17,067 19,429 24,251 PROFIT AFTER TAX 49,887 86,687 92, , ,402 CUSTOMER DEPOSIT 1,033,067,649 1,172,057 1,442,702 1,659,107 1,974,338 CUSTOMER LOANS 715,983, ,915 1,007,967 1,229,720 1,537,150 SHARE CAPITAL 14,716 14,716 14,716 14,716 14,716 SHARES OUTSTANDING 29,432 29,432 29,432 29,432 29,432 OWNER'S EQUITY 238, , , , ,504 EARNINGS PER SHARE CASH DIVIDEND 100K 155K 170K 183K 209K SCRIP DIVIDEND Nil NIL NIL NIL NIL RELEASE DATE 22/03/12 03/04/13 14/03/14 AGM DATE 19/04/12 25/04/13 14/04/14 CLOSURE DATE 29/03/12 10/04/13 28/03/14 PAYMENT DATE 19/04/12 25/04/13 14/04/14 In our analysis, Fair value is our opinion of the actual fundamental worth of a stock, irrespective of what the market is willing to pay for the stock. A BUY rating from us in our opinion, prompts investors to purchase the stock guided by their risk appetite A SELL rating from us in our opinion, prompts investors to exit the stock. A HOLD rating from us in our opinion, prompts investors to desist from buying the stock if they do not already have the stock, and not sell if they already have the stock. MorganCapital Securities Ltd The Pent Floor 3, Biaduo Street, Off Keffi Street, S/West Ikoyi. P.O.Box Victoria Island, Lagos ,

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