GTCO Capital Buffer Sufficient for Business Growth, Acquisition –Fitch
Fitch Ratings has affirmed Nigeria-based Guaranty Trust Holding Company Plc.’s (GTCO) and its core banking subsidiary Guaranty Trust Bank Limited’s (GTB) Long-Term Issuer Default Ratings (IDRs) at ‘B’ with Stable Outlooks and National Long-Term Ratings at ‘AA (nga)’.
The financial service behemoth with a holding structure is considered well capitalised, solid profitability metrics with an outlook accorded as stable by Fitch in a recent rating note. According to the rating note, the Long-Term IDRs of GTCO and GTB are driven by their standalone creditworthiness, as expressed by their Viability Ratings (VRs) of ‘b’.
The rating note explains that the VRs reflect the entities’ exposure and sensitivity to the volatile Nigerian operating environment as well as the group’s franchise strengths, solid profitability and strong capital buffers, which provide good loss-absorption capacity.
Fitch believes the failure risk at the Holdco and the bank is substantially the same as that of the whole group. GTCO’s VR also captures low double leverage which settled at 103% in 2021 at the Holdco and the expectation that any potential regulatory restrictions on GTB paying dividends or upstreaming liquidity to the Holdco will be limited.
The rating note revealed downside to operating conditions including rising global risks that is expected to weaken domestic operating conditions. The headline inflation rate continues to rise from 16.8% in April 2022 to 17.71% and Fitch analysts expect the consumer price index to remain stubbornly high.
It stated that rising inflation poses downside risks to real GDP growth forecasts of 3.1% in 2022 and 3.3% in 2023. It however added that downside risks are somewhat mitigated by strong oil prices, which should also underpin growth in non-oil sectors and banks’ asset quality.
Fitch sees high oil prices providing support for asset quality. It said GTCO’s impaired Stage 3 under IFRS 9 loan ratio improved to 6.0% in the financial year 2021 from 6.4% in 2020, reflecting the gradual easing of operating environment risks.
The group’s healthy asset quality was helped also by write-offs of 0.4% of average loans in 2021 while the loan book grew by 8.2% in the same period. The Stage 2 loans ratio also improved but remains high in the financial year 2021 at 14.3% from 16.2% and then it was heavily concentrated.
High oil prices will support GTCO’s asset quality in 2022, a projection anchored on the group’s outsized exposure to the oil and gas sector. In terms of profitability, GTCO remains strong and at the higher end of peers but was weaker in 2021 due to lower yields on the securities book which account for 24% of total assets.
The Group’s interest margin contracted to 6.8% in 2021 from 9% despite loan growth. However, profitability remains supported by consistently low loan impairment charges and good cost control as a cost-to-income ratio settled at 43% in 2021.
Capitalisation is a relative strength with GTCO’s Fitch Core Capital ratio of 28.2% at the end of the financial year 2021, the rating note stated. The Holdco total capital adequacy ratio printed at 25.4% and the tangible leverage ratio was 15.9% comparing favourably with peers.
“We believe GTCO’s capital buffers are sufficient for business growth, potential acquisitions, and meeting Basel III requirements”, Fitch Rating said. It added that the group is predominantly deposit-funded, which reflects its franchise strengths. READ: Nigeria’s Deteriorating Situation Sufficient Reason for Restructuring
The rating note revealed that low-cost current and savings accounts formed a substantial 86% of total deposits at the end of the financial year 2021, adding that Naira and foreign-currency liquidity is sufficient. #GTCO Capital Buffer Sufficient for Business Growth, Acquisition –Fitch
