Equity Analysts Bet Big on GTBank, Expect 7.2% Earnings Jump
Broadstreet’s equity analysts have received a signal to bet big Guaranty Trust Bank Plc.’s stock following a price moderation which increases the upside potential of the stock amidst projection that the bank’s earnings per share will see a 7.2% growth in 2021.
In an equity note, Chapel Hill Denham said the GTBank’s recent share price moderation raised the stock upside potential, saying the bank’s share trades at a 53% discount to its peak valuation.
While analysts projected an increase earnings based on expectation that the business restructuring is value accretive, 12-month price target has also been adjusted upward to N46.89. This implies a total return of 73% as analysts expect 11.4% dividend yield in 2021.
Valued at N850.4 billion, this means GTBank stock market value could rise to as much as N1.3 trillion based on its earnings profile and sterling performance year on year.
Chapel Hill Denham said high dividend yield is on the card for 2021. With the bank’s strong capital base which printed at 26.12% in Q1-2021, miles ahead the CBN benchmark, analysts said they see scope for higher payout.
Specifically, the investment firm sees a 45.5% payout in 2021as against 46.6% in 2020, translating to dividend per share of N3.34 and dividend yield and cover of 11.6% and 2.2x respectively.
Guaranty is Fundamentally Cheap, Says Chapel Hill Denham
The recent apathy for Nigerian equities, which reflects investors’ preference for high-yielding fixed income instruments amongst other macroeconomic idiosyncrasies, has depressed the stock price of Guaranty Trust Bank (GTB).
GTB’s share price is down 10.7% on a year-to-date basis—underperforming the broader NGX ASI and NGX Banking index with year-to-date losses of -2.8% and -8.8% respectively. As a result, GTB is fundamentally cheap—on both a historical—and relative valuation bases.
“On our estimates, the stock is trading at a 22% discount to its one-year historical P/B value and at a 53% discount from its peak valuation of 1.94x attained in 2018”, Chapel Hill Denham said in an equity report..
Analysts said, “Having revised our numbers, we delineate the potential drivers of the upside opportunities attributed to the stock”.
Loan to Deposit Ratio to Remain Soft – Analysts
We note that GTB’s loan book declined by 1.4% to N1.36 trillion in Q1-2021. In the financial year 2020, the bank grew its loan book by +10.8% to N1.66 trillion.
However, analysts at Chapel Hill Denham said they forecast loan book expansion of 5.5% year on year in 2021, expect the bank to grow credit by 7.4% on the average till 2025 on the back of faster-than-expected post-COVID economic recovery.
In addition to GTB’s rich capital buffer, noted that the bank’s capital adequacy ratio (CAR) of 26.12% as of Q1-2021) provides ample room for risk asset expansion.
Also, analysts said their expectation for a slowdown in CBN’s cash reserves ration (CRR) debits given the elevated effective CRR of 43.8% as of 2020.
“We also note that deposits grew by 3% to N3.60 trillion in Q1-2021, up by 38.6% to N3.51 trillion in financial year 2020”, analysts stated.
In line with this trend, Chapel Hill Denham forecasted that deposit will grow by 5.5% in 2021. This will translates to a loan-to-deposit ratio of 47.5% for year 2021, a marginal improvement when compare with 47.4% reported in 2020. In the first quarter of the year, the bank did 45.5%.
Analysts however projected that GTBank will grow deposit by 6.1% on the average per annum in the next five years.
“We guide that the elevated fixed income yields regime serves as a precursor to softer term deposits as large corporates now have alternative investment options.
Despite the elevated interest rate environment, we see limited pass-through on funding cost due to GTB’s favourable funding mix (CASA mix of 88.9% as at 2020”, Chapel Hill Denham said.
Analysts said this, alongside a marginal increase in asset yields on the back of higher yields on investment securities, informs their flat net interest margin (NIM) forecast of 7.8%, which is in line 7.8% in delivered in 2020.
Chapel Hill Denham Forecasts a Expansion in Earnings
For financial year 2021 forecast that GTBank earnings per share (EPS) will jump 7.2% to N7.34 following higher net interest income and higher non-interest revenue.
Chapel Hill Denham said the underlying drivers of the interest and non-interest revenue include the rise in credit-related fees, due to its loan growth forecast.
This include analysts forecast for a marginal increase in e-business income and prospect for FX revaluation gains, following upward movement in foreign exchange rate.
Accordingly, analysts said they forecast the bank return on average equity of 24.5% in 2021, adding that the implementation and consolidation of Holdco’s earnings is an upside risk to the earnings forecasts.
Rated the ticker buy, equity analysts raised price target for GTbank by 8.9% to N46.89. This implies a total return of 73% as analysts expect 11.4% dividend yield in 2021.
The share price is down 10.7% year to date but analysts see the current market price as an attractive re-entry point, saying the ongoing business restructuring is value accretive.
According to management, the proposed Holdco structure will comprise the following; commercial bank, payment services, asset, and pension fund management.
Saying while it is difficult to assess the financial impact of this exercise, Chapel Hill Denham noted that low Nigerian pension asset under management (AUM) as a relative to the gross domestic product (GDP) compared to African peers is positive for GTBank business restructuring.
the investment banking firm added that Nigeria’s youthful population and the recent introduction of transfer window in the pension industry are tailwinds for profitability in the proposed pension business.
“The bank can also leverage on its existing infrastructure and client base to bolster earnings in the payment service and asset management segments”, Chapel Hill Denham said.
Asset quality to remain solid
Despite the havoc wreaked by the COVID-19 in 2020, GTB’s asset quality remained resilient. The bank non-performing loan (NPL) ratio printed at 6.39% in 2020 but moderated to 6.08% in Q1-2021.
More so, of the N283.00 billion stage 2 loans reported as at 2020, four obligors account for 91% of the book. While the concentration risk poses some concern, management stated that efforts to restructure and recover the loans are bearing fruits.
“As a result, the possibility of these loans deteriorating to stage 3 is minimal”, analysts at Chapel Hill Denham highlighted.
The investment firm said the aforementioned alongside improving macroeconomic fundamentals as the economy pivots towards normalisation guides it view for improved asset quality over our forecast horizon.
“Thus, we forecast an NPL ratio of 6.0% in 2021, which is in line with management’s guidance for the year”, analysts explained.
Equity Analysts Bet Big on GTBank, Expect 7.2% Earnings Jump
