Analysts Estimates Show GTBank Share Price is Terribly Undervalue
Equity research analysts at WSTC Securities estimates revealed that share price of GTBank Plc is terribly undervalue, said from fundamental point of view, lender’s stock worth more than current market value.
While a re-rating is expected on the side of the market, equities investors’ mood had swung negative as stock value plunged throughout trading session last week.
Among listed banks on the Nigerian Stock Exchange, GTBank commands highest market capitalisation at ₦971.228 billion on 29.431 billion outstanding shares.
WSTC Securities estimated fair value of ₦50.55 for the stock, though lender’s share closed the market on Monday at ₦33.
In its recently released 9M-2020 results, Guaranty Trust Bank reported a slower gross earnings growth relative to what was reported in H1-2020.
A review of the financial statement showed that lender’s gross earnings in 9M-2020 grew by 2% year-on-year from ₦326.14 billion in 9M-2019 to ₦333.06 billion.
Its net interest income increased by 10% from ₦172.94 billion in 9M-2019 to ₦189.74 billion in 9M-2020.
Meanwhile non-interest income grew by 3% from ₦101.96 billion in 9M-2019 to ₦104.84 billion in 9M-2020.
In the period, operating income grew by 4% from ₦270.25 billion to ₦279.75 billion in 9M-2020 despite tough business environment.
Analysts said owing to a 300 basis points increase in cost-to-income ratio from 37% in 9M’2019 to 40% in 9M’2020, profit before tax dipped slightly by 2% from ₦170.65 billion in 9M’2019 to ₦167.35bn in 9M’2020.
The figure revealed that profit after tax declined at a higher rate of 3% from ₦146.99 billon to ₦142.28 billion, due to a higher effective tax rate.
WSTC Securities Limited explained that high-risk environment dampen lender’s prospects of bottomline growth in the period.
The Group’s total deposits rose by 29%, from ₦2.55 trillion in 9M-2019 to ₦3.30 trillion in 9M-2020.
WSTC said sustained liquidity glut in the financial system, induced by the policies of the monetary authorities, was accretive to fund generation by the Group.
On a quarter-on-quarter basis, total deposits rose by 7% from ₦3.09 trillion as of H1-2020 to ₦3.30 trillion as of 9M-2020.
Nonetheless, despite the rise in total deposits, the Group’s loan book grew by 14% from ₦1.38 trillion in 9M-2019 to ₦1.57 trillion in 9M-2020.
“We note that the growth in loan book was less than half the increase in growth of total deposits”, WSTC Securities stated.
The financial statement of the bank showed that on a quarter on quarter basis, total loans declined by 3%.
According to WSTC Securities, the numbers reported suggests that the Group was possibly hesitant to take risks during the period.
Analysts said the less-than-expected growth in loan book, despite regulatory demands, opines that lending opportunities were limited during the period.
WSTC Securities posited that rather than extend credit facilities with a high likelihood of default, the Group invested in risk-free assets instead.
Taking cue from analysts view, it was observed that investments in financial securities rose by 13% on both year on year and quarterly basis.
Financial assets held for trading also grew by 407% and 46% on a year on year and quarter on quarter basis, respectively.
As expected, analysts said the inability to grow loan book (as mandated by the Central Bank of Nigeria’s (CBN) 65% minimum Loan-to-Deposit (LDR) policy) resulted in higher CRR debits.
The Group’s restricted deposits rose materially by 104% and 11% on a year on year and quarter on quarter basis, respectively.
Consequent to the factors emphasised above, interest income on loans and advances grew by 2% from ₦224.19 billion in 9M-2019 to ₦228.23 billion in 9M-2020.
Meanwhile, on a quarter-on-quarter basis, interest income declined by 5% from ₦47.05 billion in Q3-2019 to ₦44.52 billion a year after.
WSTC explained that the quarterly decline in interest income was reflective of a combination of lower yields and decline in loan book in Q3-2020.
Cost of Fund Sustains Downward Trend:
In the period, GTBank cost of fund lowered to 1.66% from 2.54% in 9M-2019, as interest expense declined by 25% year on year from ₦51.25 billion to ₦38.49 billion in 9M’2020.
The lower interest expense incurred during the period reflected the composition of the Group’s total deposit base.
Notably, the portion of savings (the cheapest) deposits rose from 25% of total deposits as of 9M-2019 to 33% of total deposits as of 9M-2020.
Also, the portion of term (the costliest) deposits declined from 16% as of 9M-2019 to 12% as of 9M-2020.
As a result of a 25% decline in interest expense, relative to a 4% growth in interest income, net interest income grew by 10% from ₦172.94 billion in 9M-2019 to ₦189.74 billion in 9M-2020.
Meanwhile, impairment charges on loan spiked by 267% year on year from ₦2.76 billion in 9M-2019 to ₦10.15 billion.
Analysts at WSTC Securities said the spike in loan impairment charges is attributed to elevated risk expectations induced by the COVID-19 pandemic which grounded the economy.
So, lender’s net interest income after impairment charge grew by 6% from ₦170.18 billion in 9M-2019 to ₦179.59 billion.
FX Trading Gains Drive Non-Interest Income
Analysts review indicated that foreign exchange gain drive non-interest income recorded in the 9M-2020 financial result.
It was observed that non-interest income advanced by 3% from ₦101.96 billion to ₦104.84 billion in 9M’2020.
This was primarily driven by a 203% increase in FX trading gains that rose from ₦3.99 billion in 9M-2019 to ₦12.10 billion in 9M-2020.
The other line items that supported the growth in non-interest income include FX revaluation gains (+74% from ₦12.43bn to ₦21.62bn), write back on impairment of financial assets (+2710% from ₦111.00mn to ₦2.53bn).
Unfortunately, net fee and commission income declined materially by 30% from ₦46.49 billion in 9M-2019 to ₦32.73 billion.
Analysts attributed the decline in net fee and commission income to decrease in fees from transaction-related activities, as the COVID-19 pandemic took a toll on economic activities.
The Group’s net fee and commission, however, recorded an improvement on a quarter on quarter basis, up +19%, resulting from a gradual reopening of the economy.
Operating income grew by 4% from ₦270.25 billion to ₦279.75 billion in 9M-2020, mainly driven by the 6% growth in net interest income.
Meanwhile, operating expense grew by 13% from ₦99.59 billion to ₦112.40 billion in 9M-2020.
As a result of higher operating expenses incurred during the period, profit before tax declined by 2% from ₦170.65 billion to ₦167.35 billion.
Eventually, the heat caused the lender a 3% drop in profit after tax from ₦146.99 billion to ₦142.28 billion in 9M-2020.
GTBank Plc.’s Capital Adequacy Ratio (CAR) stood at 23.85% as of 9M-2020 compare with 22.93% in the first half of 2020 and 22.50% recorded in 2019.
Its CAR stood above 15% regulatory threshold during the period.
Also, non-Performing Loan (NPL) ratio improved to 6.51% from 6.80% in the first half of2020, though still ahead of 6.50% reported in 2019.
This means that the bank’s NPL ratio was above the 5% regulatory threshold during the period.
Update on Restructuring into a HoldCo:
The Group recently announced its plan to reorganise the bank to a financial holding company, which will be implemented through a scheme of arrangement between the bank and its shareholders.
According to the information provided by the Group, the issued shares in the bank will be exchanged on a one-for-one basis in the financial holding company.
The bank’s existing Global Depositary Receipts (GDRs) will also be exchanged on a one-on-one basis for new GDRs to be issued by the financial holding company.
The rationale for the business reorganisation resulted from a comprehensive strategic evaluation of the operating environment of the Nigerian banking sector in the near term.
The Board expects to drive future growth by exploring other markets and industries.
A meeting with the shareholders was ordered by the Federal High Court, concerning the business reorganisation.
Although there is no official statement from the Board yet, it was reported that shareholders approved the decision.
“We note the significant rise in the Group’s restricted deposits as of 9M’2020”, WSTC Securities explained.
Also, analysts noted the persistent decline in lender’s liquidity ratio, which suggests that the liquidity of the bank is under pressure.
“Thus, we think that the Group is careful in creating risk assets, given the regulatory challenge it is faced with, in combination with a weak macroeconomic environment.
“In our view, we believe that the recent policy decision by the CBN to issue special bills could improve the liquidity position of the Group”, analysts stated.
Due to lack of clarity around several considerations, WSTC Securities was unable to precisely estimate the potential impact.
However, on an overall assessment, the firm posited that the idea behind the CBN’s special bills is to refund the excess CRR to banks, to shore up the liquidity base of banks which would facilitate increased lending activities to the private sector.
“We, therefore, expect to see an improvement in loan growth going forward.
“Also, we think that as the economy gradually exits recession, the heightened risk associated with businesses could lower; thus, encouraging financial institutions to increase lending activities”, WSTC stated.
Given the outcome of the Group’s Q302020 operating performance and expectations for Q4-2020, analysts at WSTC Securities further lowered 2020 EPS forecast from ₦6.71 to ₦6.42.
“We also lowered our growth expectations for the Group in the near to medium term, owing to heightened regulatory risk and weak macroeconomic fundamentals”, WSTC Securities added.
The firm estimates a fair value of ₦50.55 for the stock, which implies a justified price earnings and price to book of 7.79x and 1.78x, respectively.
Currently, the stock trades at a forward price to earnings of 5.16x.
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“In our view, we think that the stock is significantly undervalued.
“From a fundamental point of view, we believe that the stock is worth more than the current market price suggests”, WSTC Securities said.
Analysts Estimates Show GTBank Share Price is Terribly Undervalue