Low Cost Business Model Continues to Deliver Value

Transcription

1 Guaranty Trust Bank Plc. Nigeria Equities Banking November 19, 2015 Low Cost Business Model Continues to Deliver Value

2 Guaranty Trust Bank Plc. Nigeria Equities Banking November 19, 2015 Low Cost Business Model Continues To Deliver Value We initiate coverage on Guaranty Trust Bank Plc. ( or the bank ), ranking among the top tier in the Nigerian banking sector. has a strong aggressive expansion strategy and has largely delivered on its targets by improved service offerings and leveraging on its status as the pioneer of 'Social Banking' in Nigeria which led to the introduction of additional channels for banking transactions. Whilst the bank has demonstrated its ability to withstand headwinds in its operating environment; we believe that macroeconomic stability, strong management team, policies that support sustainable growth and favourable competition would drive the bank s future performance in the medium to long term. Guaranty Trust Bank Plc. recently released its results to September The unaudited 9M 2015 results show an increase in gross earnings to N229.37billion, up by 15.12% compared with N199.24billion recorded in the corresponding period of 2014 supported by increased financial intermediation activities. We observed that earnings growth recorded during the period under review slipped into the double digit range in line with the bank s medium term strategic objectives from growth levels of 9.31% and 9.48% recorded in 9M2013 and 9M2014 respectively. On a quarter-on-quarter basis, gross earnings improved by 3.24% to N76.38billion in 3Q2015 compared to the deceleration of -6.38% seen in the preceding quarter. Interest income rose by 16.72% to N172.96billion in 9M2015 from N148.18billion in the corresponding period of the preceding year while noninterest income rose by 9.56% to N54.29billion from N49.55billion in 9M2014. The increase in interest income was supported by the growth in loans and income accruing on investment securities. Consequently, the contribution of interest income to gross earnings improved marginally to 75.41% in 9M2015 from 74.38% in the corresponding period of the previous year with the contribution from non-interest income declining slightly to 24.59% from 25.62% in 9M2014. Fig 1: Results highlight 9M2015 9M2014 y/y Δ Gross earnings (N.billion) % Operating income (N.billion) % Post-tax profit (N.billion) % Kate Isabota kisabota@dunnlorenmerrifield.com Price: - Current N 22.10* - Target N Recommendation: BUY * As at Wednesday November 18, 2015 Fig. 2: Stock data FYE December Price Mov t: YtD / 52wk %/-5.43% 52-week range N16.69 N31.88 Average daily vol./val. Outstanding Shares Market Cap. (N million) EPS, N, FY DPS, N, FY ,788,619/ N54.58mn 29,432million Float (% of shares outstanding) 99.82% Source: Bloomberg, NSE, DLM Research Fig. 3: Key ratios 9M ,447.20($ mn) 9M2014 Pre-tax margin 40.14% 40.50% Post-tax margin 32.77% 33.50% Loan/deposit ratio 78.43% 73.60% NPL ratio 3.16% 3.25% Source: NSE, DLM Research Fig. 4: Valuations FY2014 FY2015E FY2016F FY2017F P/E 6.92x 6.58x 6.28x 5.95x P/ B 1.82x 1.69x 1.58x 1.50x PEG ROAE 27.93% 26.63% 25.99% 25.83% ROAA 4.43% 4.29% 4.32% 4.46% Div. Yield 7.54% 7.76% 7.97% 8.19% Source: Bloomberg, DLM Research Fig. 5: ANK vs. NSE, 52-wk movement (rebased) Source: NSE, DLM Research NSE-ASI ank Nov Mar Jul Nov-15 November 19, Please read the Important Disclosures at the end of this report.

3 Fig.6: Gross earnings, N billion Fig.7: Earnings growth, % % 15.13% 9.31% 9.48% Fig.8: Interest and non-interest income, N billion Fig.9: % contribution to gross earnings, 9M2015 Non-interest income Interest Income % Interest income % Non-interest income Fig.10: Comparison across the sector- Gross earnings, N billion Fig.11: Comparison across the sector- Earnings growth Stanbic Unity Wema Stanbic IBTC Unity Wema 23.10% 18.10% 17.30% 17.20% 15.13% 12.00% 11.00% 10.30% 6.40% 3.30% 2.20% 2.90% 33.10% 42.00% November 19,

4 Interest income earned from Nigeria rose significantly during the review period by 16.51% to N155.78billion from N133.70billion in 9M2014 while income earned outside Nigeria increased by 18.56% to N17.18billion during the period. The rise in interest income rose can be attributed to the 19.79% rise in income generated from loans & advances whilst the growth of the non-interest income is on the back of 3.55% and % growth in fees and commission and trading income respectively. (fig.12) Fig. 12: Components of interest and non-interest income, N billion 9M2012 9M2013 9M2014 9M2015 Interest income Cash and cash equivalents Investment securities Loans and advances Financial assets held for trading Assets pledged as collateral Total Non-interest income Other income Trading income Fees and commission Total The rise in net interest income rose reflects the growth in lending activities despite the slight increase in funding costs recorded during the period. Interest expense increased by 23.30% to N52.83billion in 9M2015 from N42.85billion recorded in the corresponding period of the previous year. This was largely driven by the increase in interest expense on deposits to N39.41billion from N31.55billion in 9M2014. Invariably, deposits from customers accounted for the largest contribution to interest expense generated in 9M2015 with 74.58% slightly higher from 73.63% in 9M2014. Despite the fact that interest expense rose by 23.30%, it was insufficient to significantly impact on net interest income which rose by 14.04% to N120.13billion from N105.34billion in 9M2014 supported by the growth in interest income. (fig.13 & 14) Despite the fact that interest expense rose by 23.30%, it was insufficient to significantly impact on net interest income which rose by 14.04% to N120.13billion from N105.34billion in 9M2014. Fig. 13: Interest expense, N billion November 19,

5 Fig. 14: Net interest income, N billion Overall, a comparison of the net interest income of fourteen banks that have released nine months results as at the time of this report shows that s ranks fourth led by First Bank of Nigeria Holdings, Transnational Incorporated (ETI) and Bank. (fig.15) Fig. 15: Comparison across the sector - Net interest income Stanbic IBTC Unity Wema We are also inclined to highlight that the bank s NIM is higher than the peer group average of 8.55% which is impressive, in our view. The rise in interest income to N172.96billion in 9M2015 from N148.19billion in the corresponding period of 2014 supported the marginal rise in net interest margin (NIM) to 9.37%. has managed to keep its NIM above 9.00% which was particularly noteworthy as it had steadily declined in the last two periods from 12.46% in 9M2012 to 11.02% and 9.07% in 9M2013 and 9M2014 respectively. We expect this to continue in the near term based on an expectation that the bank s lending and funding strategies will fundamentally remain the same buoyed by its focus on low cost of funds, efficient management of assets and liabilities and an overall sound investment strategy. (fig.16 & 17) We expect this to continue in the near term based on an expectation that the bank s lending and funding strategies will fundamentally remain the same buoyed by its focus on low cost of funds, efficient management of assets and liabilities and an overall sound investment strategy. November 19,

6 Fig. 16: Net interest margin 12.46% 11.02% 9.07% 9.37% Fig. 17: Net interest margin Peer comparison 10.11% 10.06% 9.37% 8.77% 7.21% 5.78% Average 8.55% Non-interest income rose to N56.41billion from N51.05billion in 9M2014 supported by growth in other income. The growth of 3.55% recorded in fees and commission income seems weak when compared the growth of 6.39% recorded in 9M2014, however we are inclined to highlight that it remains slightly higher than the 3-year average of 3.19%. This slow growth in our view reflects the impact of the downward review of the Commission on Turnover (COT) charged by commercial banks on a yearly basis implemented in 2014 to N2 per mille from N3 per mille. The gradual phasing out of this charge is in line with the effort of the central bank to reduce banking transaction costs. COT charges currently stands at N1 per mille with marked effects seen on the bank s commission-on-turnover (COT) which declined to N8.39billion from N10.38billion and N10.25billion in 9M2013 and 9M2014 respectively. In addition, fees and commission expense rose by 41.49% resulting in a net fees and commission income of N37.54billion. Trading revenue rose slightly by 4.40% to N9.79billion from N9.38billion in 9M2014 with other income recording a significant increase of % to N6.96billion from N3.37billion in the corresponding period of The increase seen in other income was driven by the rise in gains from foreign exchange during the period to N6.77billion from N1.79billion in 9M2014. Overall, non-interest income increased to N56.41billion in 9M2015. (fig. 18, 19 & 20) The growth of 3.55% recorded in fees and commission income seems weak when compared the growth of 6.39% recorded in 9M2014, however we are inclined to highlight that it remains slightly higher than the 3-year average of 3.19%. November 19,

7 Fig. 18: Fees and commission income, N billion Fig. 19: Components of fees and commission income, N billion 9M2013 9M2014 9M2015 Credit related fees and commissions Commissions on turnover Corporate finance fees Commission on foreign exchange deals Income from financial guarantee contracts issued Other fees and commissions Fees and commission income Fig. 20: Non-interest income, N billion However, the 35.45% increase in impairment charges posted during the period resulted in a net operating income of N165.90billion from N148.60billion in 9M2014. Improved growth seen in net operating income to N165.90billion in 9M2015. Overall, operating income rose by 12.61% to N174.42billion from N154.89billion in 9M2014. However, the 35.45% increase in impairment charges posted during the period resulted in a net operating income of N165.90billion from N148.60billion in 9M2014. Net interest income accounted for N111.61billion representing 67.28% of operating income generated during the review period whilst non- interest income contributed N54.29billion. (fig ) November 19,

8 Fig. 21: Loan impairment charges, N billion Fig. 22: Comparison across the sector Loan impairment charges, N billion Stanbic IBTC Unity Wema Fig. 23: Comparison across the sector Loan impairment charges growth Stanbic IBTC % % % % 99.20% 65.99% 50.40% 48.10% 35.50% 32.60% Wema-51.90% % Unity % % November 19,

9 Fig. 24: Operating income, N billion 35% Operating income (right axis) Growth rate (left axis) % 25% % % 80 10% 5% % 0 Fig. 25: Percentage contribution to operating income Non-interest income Net interest income 29.68% 30.85% 33.35% 32.72% 70.32% 69.15% 66.65% 67.28% Fig. 26: Comparison across the sector Operating income, N billion Stanbic IBTC Unity Wema November 19,

10 Higher operating expenses recorded in 9M2015 driven by increase in other operating expenses. Operating expenses rose by 8.75% to N73.84billion from N67.90billion in 9M2014. However, this represents a marginal decline in OPEX growth compared to the 10.92% recorded in the previous year. The slowdown in OPEX growth in our view reflects the management s cost minimization strategy as growth levels has been maintained around the 8% band for three of out four periods considered. (fig.27) Fig. 27: Operating expenses, N billion 80 Operating Expenses (left axis) Growth rate (right axis) 12% % 8% 40 6% % 2% 0 0% Other operating expenses increased during the period to N42.09billion from N38.34billion thereby being the key driver of the increase seen in the bank s OPEX. This increase was largely driven by the rise seen in occupancy costs, advert, promotion and corporate gifts and AMCON expenses which rose to N4.21billion, N4.66billion and N7.99billion from N2.65billion, N3.68billion and N7.09billion respectively in 9M2014. Furthermore, personnel costs increased by 5.55% during the period from N20.36billion in 9M2014. (fig.28) Fig. 28: Key components of operating expenses, N billion Other operating expenses Depreciation and amortization Operating lease expenses Personnel expenses The slowdown in OPEX growth in our view reflects the management s cost minimization strategy as growth levels has been maintained around the 8% band for three of out four periods considered Cost-to-income ratio declined during the period. Due to the relative increase of 8.75% in operating expenses compared to the 11.64% increase in operating income, the November 19,

11 bank recorded a marked decline in cost-to-income ratio to 44.51% in 9M2015 from 45.69% in the preceding year. We highlight that the bank currently has the lowest cost/income ratio across the industry which signals strong management efficiency. This in our view highlights the bank s need to maintain strategies geared towards growing operating income whilst sustaining efforts at controlling costs to sail above headwinds in view of weakened economic fundamentals. (fig.29) Fig. 29: Cost-to-income ratio 42.31% 42.64% 45.69% 44.51% Overall, a comparison of the cost to income ratio of fourteen banks that have released nine months results as at the time of this report shows that s ranks 1st with its cost to income ratio higher than the industry average of 72.26%. (fig.30) Fig. 30: Comparison across the sector cost to income ratio 44.51% 55.20% 63.75% 64.56% Unity 68.78% 72.06% 73.97% Stanbic IBTC 75.13% 76.45% 80.00% 81.18% 81.74% 82.33% Wema 91.96% We highlight that the bank currently has the lowest cost/income ratio across the industry which signals strong management efficiency. Strong profitability buoyed by reduced expenses. recorded pre-tax profit of N92.06billion in 9M2015 which is 14.08% higher than N80.70billion reported in 9M2014 whilst post-tax profit increased by 12.61% y/y to N75.16billion from N66.74billion recorded in the corresponding period of the preceding year despite the 21.10% rise in income tax to N16.90billion. The strong profitability recorded during the period under November 19,

12 review is particularly noteworthy in view of the decline of -2.02% and -3.61% seen in pre and post-tax profit respectively in 9M2014. Furthermore, a comparison of the profit growth of fourteen banks that have released nine months results shows s ranking at 8th with its profit growth but above the industry average of 9.49%. (fig.31-33) Fig. 31: Pre and post-tax profit, N billion Pre-tax profit Post-tax profit Fig. 32: Comparison across the sector Post-tax profit, N billion Stanbic IBTC Unity Wema Fig. 33: Comparison across the sector Post-tax profit growth The strong profitability recorded during the period under review is particularly noteworthy in view of the decline of -2.02% and % seen in pre and post-tax profit respectively in 9M2014. Stanbic IBTC Unity Wema % -9.70% % % 21.50% 16.90% 15.50% 14.70% 12.60% 6.90% 1.80% 46.30% 44.40% 37.70% November 19,

13 However, whilst we note the growth recorded in earnings and overall profitability, we observed the steady decline in margins in the last three periods considered which poses some concerns. Pre and post-tax margins declined to 40.14% and 32.77% in 9M2015 from 40.50% and 33.50% respectively 9M2014. However in terms of profit margin, the bank s ranked first with its profit margin above the industry average of 14.98%. (fig.34-35) Fig. 34: Profit margins Pre-tax Margin Post-tax Margin 46.18% 45.26% 38.65% 38.05% 40.50% 40.14% 33.50% 32.77% Fig. 35: Comparison across the sector post-tax profit margins 24.67% 19.64% Unity 18.92% 18.67% 14.72% Stanbic IBTC 12.99% 12.85% 11.02% 10.74% 10.20% 9.27% 9.23% Wema 3.99% 32.77% However, we are of the opinion that the lower loan growth can be attributed to a selective approach to asset creation in order to minimize risk and maintain a healthy asset quality. Improved liquidity positions support loan growth. Gross loans and advances to customers in 9M2015 stood at N1.31trillion from N1.19trillion in corresponding period of the preceding year. The impairment allowance of N29.11billion resulted in net loans of N1.28trillion representing a y/y growth rate of 10.34% from N1.16trillion in 9M2014. Overall, total loans increased by 10.34% to N1.28trillion during the period. Despite the bank s capacity to significantly generate interest income, we noticed the drag in growth of total loans in 9M2015 to 10.34% significantly lower than 19.12% and 25.50% in 9M2013 and 9M2014 respectively. However, we are of the opinion that the lower loan growth can be attributed to a selective approach to asset creation in order to minimize risk and maintain a healthy asset quality. (fig.36-38) November 19,

14 Fig. 36: Total net loans, N billion Fig. 37: Comparison across the sector Total loans N billion, 9M2015 Stanbic IBTC Unity Wema Fig. 38: Comparison across the sector Total loan growth year-on-year, 9M2015 Wema Unity Stanbic IBTC -9.71% -0.64% -2.10% 2.69% 1.86% 1.65% 21.52% 20.66% 20.53% 15.12% 14.07% 12.24% 10.34% 30.52% has a well-diversified loan book spread across major economic sectors. The growth in loan book has been largely driven by exposure to oil & gas and manufacturing sectors. As at 1H2015, Oil and gas recorded the highest sectoral contribution to total November 19,

15 loans with 37.00% followed by manufacturing accounting for 17.00%. However, the bank reported that loan exposure to the oil & gas sector was spread across the various subsectors upstream (25%), mid-stream (7%) and downstream (5%). We also share the view that oil & gas exposures, particularly upstream will be the most susceptible to low oil prices and this poses some concerns. In the event that oil prices trend lower, we expect to see a diversion from risk assets channelled to sectors with huge exposure and possible restructuring of some of the portfolios by extending tenors to better match new cash flow projections. (fig.39) Fig. 39: Gross loans- sectoral contribution 1.00% 1.00% 3.00% 3.00% Marginal decline seen in proportion of non-performing loans to 3.16% in 9M2015 reflects improving asset quality. Despite the growth in gross loans and advances recorded and the increase in non-performing loans to N41.47billion from N38.70billion during the period under review, total non-performing loans as a percentage of gross loans declined slightly to 3.16% from 3.25% in 9M2014. In our view, this shows that the bank has a relatively healthy asset quality as it lies below the 5% stipulated by the CBN guideline. Whilst we note that the NPL ratio can be further reduced by maintaining strategies to de-risk the loan book, the bank s effort at risk management is worthy of note. (fig.40) 5.00% 6.00% 8.00% 13.00% 7.00% 17.00% 37.00% Oil & gas Manufacturing Information, telecommunication and transport Real estate and construction General commerce Individual Government Capital market & financial institutions Agriculture Education Others Despite the growth in gross loans and advances recorded during the period under review, total non-performing loans as a percentage of gross loans declined slightly to 3.16% from 3.25% in 9M2014. Fig. 40: Non-performing loans ratio 45 NPL (left axis) NPL ratio (right axis) 3.26% % % 3.20% 3.18% 3.16% 3.14% % 0 9M M M % November 19,

16 We are inclined to highlight that three sectors manufacturing, information telecommunication & transport and mining, oil & gas constituted 70% of nonperforming loans as at 1H2015. However, cost of risk was reported to have improved to 0.65% from 0.77% in 9M2015. (fig.41-43) Fig. 41: Non-performing loans- sectoral contribution 4.00% 2.00% 13.00% Manufacturing Information, telecommunication and transport 5.00% 6.00% 14.00% 36.00% Mining, oil & gas Capital market & financial institutions Construction General commerce Agriculture 20.00% Others Fig. 42: Comparison across the sector NPL ratio, 9M % 1.70% 3.16% 3.70% 4.70% 4.80% 4.90% 5.00% 6.20% We are inclined to highlight that three sectors manufacturing, information telecommunication & transport and mining, oil & gas constituted 70% of non-performing loans as at 1H2015. Fig. 43: Cost of risk 0.77% 0.65% 0.41% 9M M M 2015 November 19,

17 The coverage ratio (which is inclusive of regulatory risk reserves) which measures the provision made for non-performing loans was 1.41x in 9M2015 up from 1.14x and 1.20x in 9M2013 and 9M2014 respectively. The rising coverage ratio shows that the bank s ability to absorb potential losses has steadily increased over the years. (fig.44) Fig. 44: Coverage ratio M M M 2015 Total assets grew to N2.46trillion in 9M2015, up by 9.99% from N2.24trillion largely supported by an increase in loans and advances to customers and restricted deposits and other assets accounting for 52.13% and 16.15% respectively. Cash and balances with the Central Bank of Nigeria however declined by 8.83% to N255.11billion. An analysis of fourteen banks considered showed that ranked fifth in terms of total assets and represents a market share by assets of 8.64%. (fig.45 & 46) Fig. 45: Total assets, N trillion The coverage ratio (which is inclusive of regulatory risk reserves) which measures the provision made for nonperforming loans was 1.41x in 9M2015 up from 1.14x and 1.20x in 9M2013 and 9M2014 respectively November 19,

18 Fig. 46: Comparison across the sector Total assets, N billion Stanbic IBTC Unity Wema Low deposit growth seen during the period. The bank s balance sheet was funded largely by deposits which rose to N1.63trillion from N1.58trillion in 9M2014. We observed the weak deposit growth of 3.55% recorded during the period under review when compared against 19.89% and 22.64% seen in 9M2013 and 9M2014 respectively. Deposits accounted for 79.41% of total liabilities in 9M2015 lower than 83.39% in the corresponding period of the previous year. Growth was driven by savings deposits which grew by 17.44% however it ranked as the lowest contributor to total deposits at 19.62% (9M2014: 17.27%). We also note the 10.05% increase in term deposits to N443.73billion. Current deposits declined by 3.96% during the period resulted in a decline in contribution to 52.66% from 56.68% in 9M2014. We observed the slight uptick in the bank s average cost of funds to 3.29% from 2.99% in 9M2014 spurred by liquidity pressures in the banking system and the resulting spike in interest rates. (fig.47 & 48) Fig. 47: Deposits, N trillion We observed the slight uptick in the bank s average cost of funds to 3.29% from 2.99% in 9M2014 spurred by liquidity pressures in the banking system and the resulting spike in interest rates November 19,

19 Fig. 48: Composition of deposits, % 19.62% 27.72% Term deposits Current deposits Savings 52.66% An analysis of fourteen banks considered showed that Guaranty Trust Bank ranked sixth in terms of total deposits recorded during the review period. This represents a market share by total deposits of 8.17%. (fig.49 & 50) Fig. 49: Comparison across the sector Total deposits, N billion Stanbic IBTC Unity Wema An analysis of fourteen banks considered showed that Guaranty Trust Bank ranked sixth in terms of total deposits recorded during the review period. Fig. 50: Comparison across the sector Total deposits growth Stanbic IBTC Unity Wema % -5.67% -5.96% 3.64% 3.55% 3.53% 2.77% 2.55% 1.14% 9.19% 7.70% 7.68% 7.17% 17.98% November 19,

20 We are inclined to highlight that the bank is close to its 80% limit in loan to deposit ratio as mandated in the CBN s prudential guidelines for deposit money banks. Loan-to-deposit ratio increased to 78.43% from 73.60% in 9M2014 on the back of growth in loans and advances. Consequently, we expect the bank to aggressively grow its deposit base to accommodate for growth in loans. (fig.51 &52) Fig. 51: Loan/deposits ratio 72.39% 71.93% 73.60% 78.43% Fig. 52: Comparison across the sector Loan/deposits ratio Unity 86.57% 83.56% 79.27% 78.43% 76.42% 75.19% 73.05% 73.02% Stanbic IBTC 68.55% 67.75% Wema 65.37% 60.84% 54.61% 46.02% Loan-to-deposit ratio increased to 78.43% from 73.60% in 9M2014 on the back of growth in loans and advances. Consequently, we expect the bank to aggressively grow its deposit base to accommodate for growth in loans. As at 9M2015, the bank s borrowings stood at N163.23billion, up by 86.04% from the level recorded in the corresponding period of the preceding year. In addition, the Eurobond debt securities recorded during the period was N182.52billion ($828.65million) which represents the amortised cost of dollar guaranteed note issued by B.V., Netherlands. The 500 million Eurobond was issued in May 2011 for a period of 5 years at 7.5% per annum payable semi-annually. This was three years after the $350 million Regulation S Eurobond issue in January 2007, which made the first Nigerian company to issue Eurobonds and also, the first Nigerian institution to venture into the international capital markets without a sovereign guarantee or credit enhancement from any international financial institution. We are also inclined to highlight that the second November 19,

21 tranche of 400,000,000 (principal) was issued in November 2013 for a period of 5 years at 6%. Whilst we understand the rationale behind the increase in the bank s dollar debt funding, we highlight that it increases the bank s vulnerability to foreign exchange risks, particularly given the near term outlook of the naira. On the corporate bond side, we note the decline to N367.88million from N14.03billion in 9M2014. (fig.53) Fig. 53: Borrowings, N billion 9M2014 9M2015 y/y Due to IFC % Due to ADB % Due to FMO % Due to PROPARCO % Due to BOI % Due to GBTV Due to CAC % Due to KFW % Due to EDIF % Due to SCHT MSME Development Fund Bail-out Fund Total We note that the debt service coverage ratio used to measure the cash producing ability of a business entity to cover its debt payments declined during the period to 3.33x from 5.90x in 9M2014. However, this still indicates that the bank s cash flow from operations is enough to cover annual debt payments (principal and interest). This shows that the bank s operating income is enough to cover 333% of its annual debt payments which in our view signifies a healthy credit quality. This decline was primarily driven by the significant increase in principal repayments to N17.57billion from N3.82billion in 9M2014. Overall, the bank s total liabilities increased by 8.73% to N2.06trillion from N1.89trillion in 9M2014 resulting in net assets of N400.67billion in 9M2015. (fig ) Fig. 54: Debt service cover ratio Whilst we understand the rationale behind the increase in the bank s dollar debt funding, we highlight that it increases the bank s vulnerability to foreign exchange risks, particularly given the near term outlook of the naira M M M 2015 November 19,

22 Fig. 55: Net assets, N billion Fig. 56: Comparison across the sector Net assets, N billion Stanbic IBTC Unity Wema The bank s capitalization ratio increased to 0.46x from 0.42x in 9M2014 which still remains within acceptable limit. In addition, the bank s equity multiplier declined marginally to 6.14x. (fig.57 & 58) The bank s capitalization ratio increased to 0.46x from 0.42x in 9M2014 which still remains within acceptable limit. In addition, the bank s equity multiplier declined marginally to 6.14x. Fig. 57: Capitalization ratio M M M 2015 November 19,

23 Fig. 58: Equity multiplier M M M 2015 The bank s interest coverage ratio (ICR) declined to 3.14x from 3.47x in 9M2014 reflecting lower earnings available to meet interest payments and increases the bank s vulnerability to increases in interest rates. However, this still lies within acceptable limits. (fig.59) Fig. 59: Interest coverage ratio M M M 2015 The bank s debt to assets ratio declined slightly to 0.84x showing that the financial risk remains low as it stands below 1.00x. (fig.60) The bank s interest coverage ratio (ICR) declined to 3.14x from 3.47x in 9M2014 reflecting lower earnings available to meet interest payments and increases the bank s vulnerability to increases in interest rates. However, this still lies within acceptable limits. Fig. 60: Debt to assets ratio M M M 2015 November 19,

24 We note the increase in liquidity and capitalization ratio in 9M2015. Capital adequacy and liquidity ratios for the period under review stood at 20.76% and 43.95% respectively - above the regulatory benchmarks of 10% and 30% respectively. Generally, we are of the opinion that the bank has adequate funds to grow its balance sheets. We are positive on the bank s leverage, especially as it strengthens our position on the overall growth in shareholders wealth by further driving its momentum of higher return on equity. (fig.61) Fig. 61: Capital adequacy & liquidity ratio Capital adequacy ratio Liquidity ratio 43.99% 42.96% 43.95% 20.80% 18.36% 20.76% 9M M M 2015 The bank s return on average equity (ROAE) stood at 20.22% in 9M2015 slightly lower from 20.44% in the preceding year. Return on average assets also declined marginally to 3.20% from 3.25% in 9M2014. The bank has emerged as a clear leader in terms of delivering results to shareholders as return on average equity and return on average assets currently stands as the highest in the industry. (fig.62-65) The bank has emerged as a clear leader in terms of delivering results to shareholders as return on average equity and return on average assets currently stands as the highest in the industry. Fig. 62: Return on average equity 24.02% 20.30% 20.06% 9M M M 2015 November 19,

25 Fig. 63: Return on average assets 3.98% 3.22% 3.18% 9M M M 2015 Fig. 64: Comparison across the sector Return on average equity 20.22% 17.08% 15.58% 15.17% 13.15% Unity 12.98% Stanbic IBTC 11.95% 9.85% 9.39% 9.18% 8.43% 6.56% 4.28% Wema 2.93% Fig. 65: Comparison across the sector Return on average assets Unity Stanbic IBTC Wema 0.37% 1.43% 1.38% 1.18% 1.01% 0.99% 0.93% 0.92% 0.91% 1.76% 2.20% 2.15% 2.29% 3.20% November 19,

26 The company has, in recent time, paid out more and retained less of its earnings. Over the last four years, the firm has consistently paid dividend and has an average cash dividend payout ratio of 55.65% over the period, while average retention ratio stands at 44.35%. (fig.66 & 67) Fig. 66: Dividend per share, N FY2011 FY2012 FY2013 FY2014 Fig. 67: Payout and retention rates Payout ratio Retention ratio 62.57% 52.26% 55.58% 52.19% 47.74% 44.42% 47.81% Over the last four years, the firm has consistently paid dividend and has an average cash dividend payout ratio of 55.65% over the period % FY2011 FY2012 FY2013 FY2014 November 19,

27 FY2015- Earnings expectation We forecast a year-on-year increase in gross earnings of 8.68% from N278.52billion to N302.68billion in FY2015, with a post-tax profit of N103.77billion; an improvement of 5.14% y/y in the same period. (fig.68) Fig. 68: Gross earnings & post-tax profit, N billion 350 Gross Earnings Post-tax profit FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E 0 Consequently, we expect a relative decline in pre and post-tax margins to 40.81% and 34.28% in FY2015 from 41.79% and 35.44% in FY2014. (fig.69) Fig. 69: pre & post tax margins Pre-tax Margin Post-tax Margin 34.03% 46.19% 39.13% 44.13% 37.10% 41.79% 40.81% 35.44% 34.28% 27.45% 23.49% 28.37% FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E November 19,

28 Investment conclusion Over the years, Guaranty Trust bank has been characterized by adequate capital base, strong profitability, low cost business model, healthy asset quality driven by sound underwriting, and an aggressive growth strategy implemented by its management team. The bank has high corporate lending expertise and reputation founded upon quality service delivery and huge leverage of social media. We are also inclined to highlight that the bank has a concentrated customer base which increases vulnerability to weakening industry specific conditions. As a result, loan concentration risks are inherent as a significant number of huge corporate defaults could negatively impact on the bank's capital base. We also observed that bank s major competitors have more extensive branch networks. In our view, the bank would needs to further improve service delivery by expanding its retail market and increasing its branch network. Overall, we note that a probability of debt default remains largely minimal as the bank appears to be stable with relatively healthy fundamentals. We remain optimistic that the bank will continue to leverage on its strong track record and improved capital base to support growth in the medium term. Hence, we are of the view that adverse changes in the macro-economic and regulatory environment will not significantly affect the bank s ability to meet payment obligations as at when due. A protracted economic downturn driven by lower oil prices remains a risk as the economic implications for Nigeria will invariably affect the bank s performance. The impact will be transmitted through austerity measures likely to be put in place which would reduce household savings and consequently deposits, tighter rules by the CBN - commencement of the treasury single account scheme among others. In conclusion, the bank has demonstrated its ability to withstand headwinds in its operating environment. However, we believe that these factors would drive the bank s future performance in the medium to long term: macroeconomic stability, a stable political environment, the sustenance of policies that have so far driven the growth of the banking sector in recent time, ability to ensure that the bank s risk management structures and processes are continually reviewed to ensure risks are tightly managed, ability to compete favourably due to proliferation of financial products in the Nigerian banking space and conditions within the international financial markets. Over the years, Guaranty Trust bank has been characterized by adequate capital base, strong profitability, low cost business model, healthy asset quality driven by sound underwriting, and an aggressive growth strategy implemented by its management team. November 19,

29 Our Valuation In arriving at a fair value for Guaranty Trust Bank Plc., we employed multiples of price/earnings, price/sales, price/book and the DDM Methodology. Consequently, we arrived at a target price of N From the foregoing, we place a BUY recommendation on the stock of Guaranty Trust Bank Plc. in the short term investment horizon. We remain optimistic about the attainment of steady growth into the future reinforced by the bank s strong balance sheet and commitment to enhance service delivery. The continuous investment in massive investments in information technology is also in line with the Central Bank of Nigeria s financial inclusion strategy as the bank is poised to increase revenue generation through retail expansion amidst stiffer competition. Overall, we remain positive on the outlook of Guaranty Trust Bank Plc. as we expect the bank to continue to leverage on operational efficiency and sustainable growth strategies for greater performance This reinforces our assertion of the bank s ability to absorb economic shocks to a significant extent, despite the assumption of growing pressure on banks' credit quality and profitability. From the foregoing, we place a BUY recommendation on the stock of Guaranty Trust Bank Plc in the short term investment horizon. November 19,

30 Risks to our valuation Industry Risk: We are of the opinion that several banks would embark on capital raising strategies in the short to medium term. This could result in the banks focusing on the same space invariably leading to a more intense competitive environment and the proliferation of financial products. Political Risk: These include key factors including a stable political environment and the sustenance of policies that have so far driven the growth of the banking sector in recent time. Operational Risk: The ability to ensure that the bank s risk management structures and processes are continually reviewed to ensure risks are effectively managed and appropriate risk response adopted. Competition: We believe that would operate in a tougher competitive market as the sector evolves over the medium term. Market risks: Given the degree of foreign participation in the Nigerian equity market evidenced by the huge inflow of funds from foreign fund managers and private equity firms, the industry is vulnerable to shocks within the international financial markets. In the event that other African markets appear attractive, offshore investors could decide to take their monies elsewhere leading to a decline in the market. We believe that would operate in a tougher competitive market as the sector evolves over the medium term. November 19,

31 Company Synopsis. Guaranty Trust Bank plc. ( Guaranty Trust Bank or the bank ) is a Nigerian financial institution with vast business outlays spanning Anglophone/Francophone, West Africa, East Africa and the United Kingdom. Guaranty Trust Bank currently has an asset base of N2.36trillion thereby ranking as the fifth largest bank in Nigeria. The bank was incorporated as a limited liability company licensed to provide commercial and other banking services to the Nigerian public in 1990 and commenced operations in February In September 1996, it became a publicly quoted company and was granted a universal banking license in Its second share offering was done in 2004 with over N11 billion raised from Nigerian Investors to expand its operations and support favourable competition. Post-consolidation, Guaranty Trust Bank made a strategic decision to actively pursue retail banking. In 2007, the bank became the first Nigerian financial Institution to undertake a $350 million regulation S Eurobond issue and a $750 million Global Depositary Receipts (GDR) Offer. In December 2009, Guaranty Trust Bank successfully completed the first tranche of its $200 million corporate bond targeted at increasing the depth of its operations in West Africa and Europe. In May 2011, the Bank successfully launched a US$500 million bond - the first non-sovereign benchmark bond offering from sub-saharan Africa (outside South Africa), to the international community. In 2013, the Bank issued a USD 400,000,000 Euro bond at a coupon rate of 6%; the least obtained by a Nigerian company in the international capital market. The Eurobond was issued under the USD 2,000,000 Global Medium Term Note Programme, which is registered under both Regulation in the United State of America and Rule 144A in the United Kingdom and sold to investors across Africa, America, Asia and Europe The shareholding structure of as at December , shows authorized share capital of 50.00billion ordinary shares of 50 kobo each and issued share capital at 29.43billion ordinary shares of 50 kobo each. (fig.70) Fig. 70: Directors interest in issued share capital 31-Dec Dec Dec Dec-13 Direct Indirect* Direct Indirect* Mr. Egbert Imomoh 1,102,972 6,243,128 1,102,972 6,243,128 Mr. Olusegun Agbaje 32,146,651 9,481,350 32,146,651 9,481,350 Mrs. Cathy Echeozo 2,505,118 2,940,300 2,505,118 2,940,300 Mr. Andrew Alli 1,163,975-1,163,975 - Mr. Akindele Akintoye 13,800-13,800 - Mr. H. A. Oyinlola Mr. Adebayo Adeola 4,869,492-4,869,492 - Mr. Ibrahim Hassan 630,838-1,130,838 - Mr. Olabode Agusto 200, ,000 - Mrs. Olutola Omotola 452, , , ,350 Mr. Demola Odeyemi 7,661,601 1,688,550 7,661, ,200 Mr. Wale Oyedeji 492, ,787 - Mr. Ohis Ohiwerei 2,000,000-2,000,000 - Mrs. O. A. Demuren 356, ,427 - * Indirect includes indirect shareholding and/or GDR (Global Depository Receipts) November 19,

32 Business Segments Guaranty Trust Bank Plc. has five strategic business units which offer diverse products and services. They include: Corporate banking, Commercial banking, Retail banking, SME banking and the Public Sector. We note that 49.50% of total revenue is generated from corporate banking followed by retail and commercial banking with 24.10% and 14.40% respectively as at FY2014 (fig.71-75). We are of the view that the performance of the retail banking segment reflects growing customer base driven by the massive investment in telephone contact centre to ensure real time responses to customers enquiries. Fig. 71: Segment contribution to revenue, FY % 14.40% 6.50% 49.50% Corporate Retail Commercial 24.10% Public sector SME Fig. 72: Segment contribution to profit before tax, FY % 9.30% 6.10% Corporate Retail 18.90% 64.00% Commercial Public sector SME Fig. 73: Segment contribution to profit before tax, FY % 2.70% 12.40% 14.50% Corporate Retail Commercial 65.30% Public sector SME November 19,

33 Fig. 74: Significant subsidiaries Year of establishment Ownership interest Noncontrolling interest Guaranty Trust Bank Gambia Limited % 22.19% Guaranty Trust Bank Sierra Leone Limited % 15.76% Guaranty Trust Bank Ghana Limited % 4.63% Guaranty Trust Bank UK Limited % 0.00% Guaranty Trust Bank Liberia Limited % 0.57% Guaranty Trust Bank Cote D Ivoire Limited % 0.00% Guaranty Trust Bank Kenya Limited* % 30.00% Special purpose entities: Staff Investment Trust (Nigeria) % 0.00% Guaranty Trust Bank Finance BV (Netherland) % 0.00% Indirect investment in Sub-subsidiaries Guaranty Trust Bank Rwanda Limited* % 64.00% Guaranty Trust Bank Uganda Limited* % 70.00% * Year of acquisition Guaranty Trust Bank plc. (Nigeria) accounted for the largest contribution to overall pretax profit recorded in 1H2015 with 92.23% followed by Ghana with 4.14%. Fig. 75: Segment contribution to pre-tax profit, 1H % 4.14% Nigeria Ghana 92.23% Others November 19,

34 Fig. 76: Statement of Profit or Loss, N million FY2014 FY2015E FY2016F FY2017F Gross earnings 278, , , ,257 Change 14.78% 8.68% 5.99% 6.69% Interest income 200, , , ,203 Change 8.21% 7.00% 7.50% 8.00% Interest expense 58,211 66,108 70,736 74,273 Change 20.16% 13.57% 7.00% 5.00% Net interest income 142, , , ,930 Change 3.98% 4.32% 7.72% 9.33% Net Fee & commission income 45,856 46,956 48,200 49,502 Change 2.34% 2.40% 2.65% 2.70% Net trading income 28,274 30,960 32,508 33,971 Change % 9.50% 5.00% 4.50% Other operating income 1,674 7,532 7,758 7,991 Change % % 3.00% 3.00% Operating income 211, , , ,167 Change 11.39% 6.30% 6.03% 6.82% Operating expenses 94, , , ,335 Change 14.91% 6.50% 6.00% 6.00% Profit before tax 116, , , ,831 Change 8.68% 6.14% 6.05% 7.49% Income tax 17,691 19,766 22,272 26,085 Change 3.65% 11.73% 12.68% 17.12% Profit for the year 98, , , ,747 Change 9.63% 5.14% 4.79% 5.52% Fig. 78: Valuation metrics FY2014 FY2015E FY2016F FY2017F P/B P/E PEG Dividend yield 7.54% 7.76% 7.97% 8.19% Fig. 79: Asset quality FY2014 FY2015E FY2016F FY2017F Loan/assets 54.39% 55.29% 56.38% 56.68% Loan/deposit 77.67% 80.68% 82.25% 81.45% Deposit/equity 4.41x 4.20x 4.05x 3.95x Equity/asset 15.89% 16.33% 16.91% 17.63% Deposit/asset 70.03% 68.53% 68.55% 69.59% Fig. 80: Investment ratios FY2014 FY2015E FY2016F FY2017F EPS DPS ROAE 27.93% 26.63% 25.99% 25.83% ROAA 4.43% 4.29% 4.32% 4.46% Liquidity ratio 40.07% 39.20% 38.93% 37.60% Capital adequacy ratio 21.40% 20.10% 20.00% 20.00% NAV/share Equity multiplier 6.29x 6.12x 5.91x 5.67x Dupont ROE 26.37% 25.63% 25.18% 25.13% Fig. 77: Statement of Financial Position, N million FY2014 FY2015E FY2016F FY2017F Cash and balances with CBN 246, , , ,683 Other debit balances 307, , , ,925 Financial assets 428, , , ,519 Loan and advances 1,281,377 1,371,073 1,439,627 1,468,419 Intangible assets 12,516 13,330 13,930 14,556 Property, plant & equipment 76,236 85,385 92, ,444 Other assets 2,358 2,240 2,128 2,022 Total assets 2,355,877 2,479,892 2,553,330 2,590,569 Deposits 1,649,870 1,699,366 1,750,347 1,802,857 Total liabilities 1,981,544 2,074,990 2,121,492 2,133,975 Equity 374, , , ,594 Total equity and liabilities 2,355,877 2,479,892 2,553,330 2,590,569 Source: NSE, DLM Research Fig. 81: Profitability& efficiency ratios FY2014 FY2015E FY2016F FY2017F Cost/income 44.87% 44.95% 44.94% 44.59% Pre-tax margin 41.79% 40.81% 40.84% 41.15% Post-tax margin 35.44% 34.28% 33.90% 33.53% Net interest margin 11.11% 10.83% 11.11% 11.91% Asset turnover 11.82% 12.21% 12.56% 13.21% Average lending rate 17.52% 16.18% 16.42% 17.14% Average cost of fund 3.76% 3.95% 4.10% 4.18% Interest spread 13.76% 12.24% 12.32% 12.96% Source: NSE, DLM Research November 19,

35 Equity research methodology employed in this report Views documented in this equity research report stem from conclusions reached through the use of multiple valuation methodologies, industry-wide knowledge, company specific information and our near to medium term expectations of industry and company performance, as well as market outlook. Our forecasts are based on a combination of top down and bottom up analysis, alongside historical trends in industry and company financials. Where appropriate, we factored in available forecasts and business direction provided by company management. This equity research report qualifies as an initiation research report on the company whose stock has been analysed, hence the level and depth of details documented herein. Further updates on this company, or its stock, or both, will be communicated to investors via brief research notes or earnings-flash s, as occasion demands. Our recommendation is slightly biased towards value investing. Therefore, our investment rank gauge a customized scale we use to judge how well a firm under coverage has performed is determined using major value parameters as well as relevant ratios and multiples computed with figures from the company s most recent financials. The investment rank or grade given to a company is an alphabet which falls in the set {A+, A, B, C+, C, D, E, F}, where Grade A+ means the company has done excellently well on all fronts that form the basis of our consideration, and has a strongly positive performance outlook. Grade A means the company s performance is of high quality, but can be made better. Outlook for the company is positive. Grade B means the company performed marginally above average, at least relative to its peers, but faltered on some fronts. Outlook is weakly positive. Grade C+ means the company s performance is exactly average; outlook is neither positive nor negative. Grades C and D indicate that dwindling performance is the company s fate at the current time. Outlook for the company is mildly negative. Grades E and F mean the company is headed for towards jeopardy, which might impair its ability to continue as a going concern. Outlook for the company in this case is alarmingly negative. The variables used to arrive at the company s investment rank cover a wide range of measures which characterize liquidity, operational efficiency, profitability, profitability margins, growth, economic profitability, gearing, relative valuation ratios, capital structure and management performance. Our investment recommendation is underpinned by the upside or downside potential of a stock under coverage. This potential is estimated by comparing the stock s current market price to its price target and fair value, on a percentage increase or decrease basis as summarized below: Deviation from current price Recommendation >30% STRONG BUY 10% to < 30% BUY -10% to < 10% HOLD <-10% SELL Source: Company Financials, DLM Research In our analysis, we distinguish between fair value and price target. Fair value is our opinion of the actual fundamental worth of a stock, irrespective of what the market thinks of the stock or what investors are willing to pay for it. Value investors purchase stocks way below their fair values, while income investors might purchase stocks at their fair values at the very maximum. Price target, on the other hand, is the estimated price we opine the stock will trade in the near to medium term. It is the price that, if realized, could result in the best investment returns, given prevailing market conditions. It gives an idea of the price other investors might be willing to pay for a stock regardless of its actual worth. We employ fair value, price target or both to determine a stock s upside or downside potential. A BUY recommendation directly means what it says; purchase the stock according to your wallet and appetite for risk. A SELL recommendation prompts investors to exit their positions in the stock, as the analyst believes the stock is not worth investors time and capital commitment. A HOLD recommendation generally tells investors to do nothing; if you have not bought the stock, do not buy it and if you have bought it, do not sell it. November 19,