Equity Research Report Guaranty Trust Bank Plc. Impressive earnings despite marginal top-line growth
Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Thousands Earnings Update 5 4 3 2 1 BUY Target Price ( ) 58.48 NSE Reuters Bloomberg Ticker Details GUARANTY GUARANTY.LG GUARANTY:NL Ownership Structure Individual and institutional 1.% Stock Information Current Price ( ) 44.1 Shares Outstanding (Mn) 29,431.18 Market Cap ( 'Mn) 1,297,915.4 P/B 2.12 P/E 7.29 P/E Est. 8.45 Year-High ( ) 54.71 Year-Low ( ) 4.55 Y-t-D Return 8.22% Upside Potential +32.61% Stock Price Trend NSEASI GUARANTY 6 5 4 3 2 1 Company Brief Guaranty Trust Bank Plc. (Ticker: GUARANTY), also known as GTBank, is a leading financial institution in Africa. With operations spanning across strategic locations in Africa, as well as the United Kingdom, GTBank stands out as one of the most profitable and well managed banks in Africa. On the back of the non-re-occurrence of huge FX revaluation gains witnessed in 216, the bank s gross earnings advanced marginally by 1.% In its recently released FY217 scorecard. However, due to the bank s cost leadership strategy and its management s remarkable operational efficiency, bottom-line advanced by 29.% to NGN17.47bn. Marginal top-line growth as non-interest income pares 57.% In FY217, we witnessed a flat growth in gross earnings on the back of the non-reoccurrence of the huge FX revaluation gains recorded in the prior financial year. An analysis of other components of gross earnings shows that while interest income advanced by 25.% y/y (ZENITHBNK: 23.54%, UBA: 23.45%, ACCESS: +28.25%), fees and commission moved northwards by 9.% (vs. -24.% in FY216). However, in Q4217 standalone, interest income declined by 1.89% (ZENITHBNK: +14.39, UBA: +7.25%, ACCESS: +5.77%). 6 5 4 3 2 1 Gross Earnings Fee and Commission Interest Income Other non-interest income (net) 28 29 21 211 212 213 214 215 216 217 218F 219F Comparable Banks NSE Ticker Last Price P/E P/B Y-t-D % Δ. ZENITHBANK 27.5 4.85 1.5 7.25% ACCESS 11.9 5.48.67 13.88% UBA 11.9 5.35.8 15.53% FBNH 12.2 19.86.69 38.64% Favour Usifo favouru@morgancapitalgroup.com In FY218, we forecast an advancement in gross earnings by c.5.% to NGN438bn, barring the moderating yield environment. We expect the growth to be supported by an improvement in e-business income and commission on FX deals as the business environment improves. Asset quality remains strong despite heightened NPL in telecoms The economic headwinds witnessed in 216 resulted in an increase in loan defaults in the banking industry. In line with this, GTBank s NPL to total loans increased above the regulatory limit to 7.66% in FY217 (vs. 3.9% in Q3217), following the classification of a single exposure in the telecoms sector. We forecast an NPL ratio of c.4.5% in FY218, while noting the progress made on the sale of the debt-ridden telecom operator s assets. We expect an improvement in the bank s asset quality as the gradual growth in GDP figures is expected to increase the ability of obligors to make principal and interest payments as they fall due. 1
Earnings Update Target Price Estimated at NGN58.48 We forecast a moderation in PAT growth to 19.% in FY218, with an expected EPS of NGN6.92. Our estimate for gross earnings (+5.%) will be supported by an advancement in non-interest income, as line items such as fees and commission income grow on the back of an improvement in macroeconomic variables. Given the uncertainty in mid-term interest rates, we remain cautious in our outlook for loan growth and forecast a 6.% growth in interest income in the period. Finally, we expect the bank to maintain its cost leadership competitive strategy in the industry. Our 218 target price is estimated at NGN58.48 from NGN54.35, with an expected ROE of 29.7% (vs. 27.8% in FY217). 4. Average P/E Average P/B Average P/Tangible Book 35. 3. 25. 2. 15. 1. 5.. 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Key Financial Summary INCOME STATEMENT (NGN Mn) 214 215 216 217 218F 219F Gross Earnings 278,247 31,85 414,616 419,226 438,411 498,238 Net Interest Income 142,392 159,947 195,4 246,663 282,253 314,567 Loan Impairment Charges (7,98) (12,48) (65,29) (12,169) (15,256) (16,723) Non-interest income (net) 75,53 69,534 148,665 89,73 88,517 12,693 Profit from continuing activities 98,695 99,437 132,281 17,47 23,63 229,387 BALANCE SHEET (NGN Mn) 214 215 216 217 218F 219F Total Assets 2,355,877 2,524,594 3,116,393 3,351,97 3,686,26 4,54,827 Total Liabilities 1,981,544 2,111,32 2,611,491 2,725,929 2,99,791 3,296,86 Retained Earnings 61,43 51,9 9,274 128,386 167,796 193,474 Core capital 368,653 47,173 496,6 613,685 685,879 747,813 Total Equity 374,333 413,562 54,93 625,168 695,416 757,967 ADDITIONAL INFORMATION 214 215 216 217 218F 219F Shares outstanding 29,431 29,431 29,431 29,431 29,431 29,431 EPS 3.35 3.38 4.49 5.79 6.92 7.79 DPS 1.75 1.77 2. 2.2 2.5 2.7 BVPS 12.53 13.83 16.85 2.85 23.3 25.41 2
Fair Value Estimate Earnings Update In arriving at our fair value estimate, our analyst(s) utilised a blend of valuation methodologies such as; the Discounted Cash Flow (DCF), Residual Income (RI) and Dividend Discount and Relative Multiples methodologies. Consequently, a weighted average price is obtained based on specific company characteristics, industry standards and the broader economy. Investment Ratings BUY: We expect a total return of over 2% within the next twelve months on the counter. ACCUMULATE: We expect a total return of between 1% and 2% within the next twelve months on the counter. HOLD: We expect a total return less than 1% within the next twelve months on the counter. REDUCE: We expect a total return less than or equal to % within the next twelve months on the counter. SELL: We advise clients to sell the stock as it trades at a premium to its intrinsic value. UR: Under Review - We currently do not have an investment recommendation on the stock. 3
Earnings Update MorganCapital Securities Limited ("MorganCapital"), formerly known as International Capital Securities Limited, was incorporated on 28th January, 1997; and was issued a license as a Dealing Member of the NSE on 3rd October, 1997, after obtaining license of the Securities & Exchange Commission (SEC) as a Broker/Dealer. The Company has remained a dealing member firm of the NSE since then (over 17years ago). In 29, MorganCapital got licensed by the SEC to perform an additional role as an Issuing House/Financial Adviser. MorganCapital was recently accredited by the Nigerian Stock Exchange as a Designated Adviser to the Alternative Securities Market (ASeM) Board, after a very rigorous and competitive process. MorganCapital is a full fledge Investment Banking, Securities Trading and Principal Investments Firm, with licenses from the Nigerian Securities & Exchange Commission and the Nigerian Stock Exchange. MorganCapital provides a comprehensive range of investment banking and financial advisory services to private, public sector, corporate, and institutional clients. In the past 15months (up to March, 213), our Firm has participated in fund raising programs that assisted State Governments in Nigeria to raise over N11bn in Bonds (either as Issuing House/Stockbrokers/Placement Agents). We have also assisted numerous private sector organizations in accessing funds from the Capital Market. Our firm has very strong contacts with many African-focused & emerging markets investors/fund managers. MorganCapital has advised on a number of transactions in the Nigerian Capital Markets, including provision of Financial Advisory Service to the Federal Government of Nigeria, through the Bureau of Public Enterprises ("BPE") for the concessioning of the National Arts Theater, the Tafawa Balewa Square, the Lagos Trade fair complex and the 6 National Stadia. MorganCapital also advised the BPE on the proposed sale of the Ijora Power Plant, the Calabar Power Plant and the Oji River coal-fired power plant. Our group is focused on providing unbiased financial advisory and investment banking services to individuals and institutions that are seeking to invest in Africa or already involved in investing in Africa. One of our goals is to be the BEST link to the Nigerian Capital Market. CONTACT US Research Favour Usifo favouru@morgancapitalgroup.com Investment Banking Adewale Adetiba adewalea@morgancapitalgroup.com Kehinde Olasehinde kehindeo@morgancapitalgroup.com Securities Dealing Ogochukwu Njoku ogochukwun@morgancapitalgroup.com Michael Joel michaelj@morgancapitalgroup.com For further information, please contact: MorganCapital Securities Limited The Pent House 3 Biaduo Street, Off Keffi Street S/West Ikoyi Lagos, Nigeria Tel: 234-(1) 3429613, 234-(1)454114 Email: info@morgancapitalgroup.com www.morgancapitalgroup.com Disclaimer: This report by MorganCapital Securities Ltd is for information purposes only. The company and its employees do not guarantee the accuracy of the information provided as such information was gathered from primary and secondary reliable sources. We, therefore, do not take responsibili ty for any loss arising from the use of the information. 4