Guaranty Trust Bank Plc

GUARANTY TRUST BANK PLC

Ticker:                            GUARANTYNature of Business:    BankingLocation :                              Nigeria
Recent Price:           NGN28.65    52-Week High/Low: NGN38.45/20.60Estimated Fair Value:      NGN34.63-NGN38.37
Expected Return:      38.2%Consider Buy:                   Below NGN38.37Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Strong

Company Overview
Guaranty Trust Bank Plc (GUARANTY), a top-tier Nigerian bank with presence in West Africa, East Africa and Europe.   It remains one of the most capitalised banks in Nigeria. The bank began as a private limited liability company in 1990. It was converted to a public company in April 1996 and its shares were quoted on the Nigerian Stock Exchange in September of the same year.

The shareholders sanctioned the restructuring of GUARANTY into a holding company with banking and non-banking subsidiaries in December 2020. The holding company, Guaranty Trust Holding Company Plc, would help broaden its offerings and take advantage of opportunities in the financial services sector. Right now, 4.7% of its shares are listed on the London Stock Exchange as Global Depositary Receipts (GDRs). Besides, Stanbic Nominees Nigeria Limited keeps 22% of its equity stake for various investors.

GUARANTY operates principally in Nigeria. It derives about 80% of its top and bottom lines from Nigeria. The bank is spreading its tentacles across Africa by extending its services to East Africa. The purchase of a 70% equity stake in FINA Bank in 2013 enabled the bank to capture East Africa countries of Kenya, Uganda and Rwanda. It now has a  presence in ten African countries.

The Bank has the following overseas subsidiaries: Guaranty Trust Bank Gambia Limited, Guaranty Trust Bank Sierra Leone Limited, Guaranty Trust Bank Ghana Limited, Guaranty Trust Bank United Kingdom Limited, Guaranty Trust Bank Liberia Limited, Guaranty Trust Bank Cote D’Ivoire S.A., Guaranty Trust Bank Kenya Limited, Guaranty Trust Bank Tanzania Limited, Guaranty Trust Bank Rwanda Limited and Guaranty Trust Bank Uganda Limited. GTB Finance B.V. Netherlands is a special purpose entity used to raise funds from the international financial market.

Mrs. Osaretin Demuren replaced Mr. Egbert Imomoh, the board chairman who retired on 31st March 2015. Mrs. Demuren joined the board as a non-executive director on 17th April 2013. Mr. J.K.O. Agbaje, the Chief Executive Officer (CEO), leads the management team. Mr. B.T. Soyoye, a non-executive director retired in July 2020. The fourteen-man board of directors uses six committees in carrying out its oversight functions.

Investment Thesis
GUARANTY provides banking services to large, well-established and financially stable businesses through its corporate banking business division. It also provides banking services to individuals, the public sector and Small and Medium-Size Enterprises (SMEs).  Though corporate banking remains its forte, GUARANTY has been able to penetrate the retail end of the market by offering innovative products to private customers; access to cheap deposits has improved as a result. Deposits from retail customers have grown at a compound annual rate of 21.8% while loans to private individuals have increased by 10.8% over the past three years. Besides, the retail customers now produce about half of the total non-bank deposits and close to 12% of gross loans to customers.

Retail lending is much more lucrative than corporate lending, despite the risk involved. GUARANTY could capitalise on the retail segment and reduce its reliance on foreign loans given the depreciation of the currency in its main area of operation, Nigeria. But it appears to find competing in the lucrative retail end of the market a herculean task. Liabilities from that business segment have been exceeding the total assets thereby impacting the net assets of the business negatively.

Corporate customers get about 90% of customer loans.  It is relatively less risky to lend to this group of customers.  It is little wonder the proportion of gross loans that is non-performing has been on the decline in recent years. The loan loss provision of 4.6% in the year 2020 may be inadequate considering the current economic realities. The oil and gas sector takes a sizeable portion of its loan portfolio.  We are of the opinion that GUARANTY’s exposure to the oil and gas sector does not bode well for the company in this angst-filled time.

GUARANTY is adequately capitalised and the quality of its assets is not in doubt. We recommend a buy because it is trading below our fair value estimate.

Valuation
GUARANTY trades at 7.6 times average Earnings Per Share (EPS) and 1.9 times average Book Value Per Share (BVPS). The company has an Earnings Power Value of NGN25.00 per share. We have valued a share of the company between NGN34.63 and NGN38.37. So, at the current market price of NGN28.65, GUARANTY is undervalued.

Financial Overview
GUARANTY has been growing its top and bottom lines by 11.6% and 17.7% respectively over the past ten years. Corporate banking was responsible for about 57% of gross earnings and 69% of net earnings.  Interest income which is the bank’s core income accounted for 66.1% of gross earnings, trailing its 12-year historical average by 6.1 percentage points. Fee and commission income of NGN53.2 billion translated into a fall of 14.8% compared to a rise of 19.2% of a year earlier. Net interest income increased by 9.6% to NGN253.7 billion while Profit Before Tax(PBT) of NGN238.1 billion was a  gain of 2.8% year-over-year. Net interest margin averaged 53.6% over the past twelve years.

Cost of operations to gross income increase from 30.1% in 2019 to 32.4% in 2020. Provision for loan impairment was 4.6%. Return on Equity (RoE) and Return on Assets (RoA) were 25.9% and 4.3% respectively. Earnings Per Share gained 8.7% in 2020 compared to an increase of 3.3% recorded a year ago. Also, Book Value Per Share grew to NGN27.67 from NGN23.35; this was an improvement of 18.5% in one year.

GUARANTY is growing the size and quality of its assets and shareholders’ fund. However, retail banking has a major negative impact on the bank’s net assets. The bank seems to be running this business at a relatively higher cost.

Customers deposits have started growing faster than loans granted to customers. Over the past three years, customers deposits expanded by 19.4% while customers loans grew by 14.6%. Loans to deposit ratios shed 12.2 percentage points to 49.7% at the end of the 2020 fiscal year. Again, corporate deposits have grown more slowly than retail deposits for two consecutive years.

Debts are decreasing; total debts stood at NGN113.9 billion in 2020, down by 30.1% from NGN163 billion. Debts formed 14% of shareholders’ fund in comparison to 23.7% of the previous year. GUARANTY is not illiquid; its long-term solvency, in our opinion, is not impaired.

Business Risk
GUARANTY’s revenue base is not well-diversified.  And it is subject to intense competitive pressure in the industry as it has a weak competitive advantage. The quality of its loan portfolio may deteriorate as the default rate rises owing to the  COVID-19 pandemic that has harmed many economies of the world.

Recommendation: Buy

Earnings Chart of Guaranty Trust Bank Plc

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