HoldCo: Update on GTBank Restructuring

According to Guaranty Trust Bank (GTBank) Plc management, the plan to convert the bank to a holding company is now in its final stages, following the approval-in-principle secured recently from the Central Bank of Nigeria to run its operation using the holding company model.

Initially projected to be completed by Q1:2021, the plan suffered a setback in timelines due to the COVID-19 pandemic; and is now expected to be finalized by H2:2021. The new company will have in its portfolio the extant banking business, a payments company, an asset management company as well as a pension fund business. Management has indicated that it intends to leverage its solid retail banking business to drive operations of the new businesses.

Recently, a number of banks (GTBank, Sterling Bank and Access Bank) approached the Central Bank of Nigeria (CBN), requesting approval to model their operations in line with the holding company (HoldCo) structure. This has been the trend in the Nigerian banking sector, lately.

In our view, the bank is well-positioned to create value for shareholders from the new businesses given its strong brand appeal, and track record of delivering innovative banking solutions. Also, to its advantage is the current regulatory environment which favours fintech development.

Furthermore, the bank’s African (ex-Nigeria) franchise is set to gain significance in terms of contribution to group performance with the creation of GTBank Nigeria, GTBank West Africa and GTBank East Africa. While Management weighs the option of business expansion through mergers and acquisitions in the rest of Africa, it is confident that it can drive scale via its planned fintech capabilities.

2.3% Rise in Profit to N201Bn in 2020, Proposes N2.70k Final Dividend

Guaranty Trust Bank (GTBank) Plc grew its gross earnings in 2020FY by 4.58% YoY to NGN455.23bn on the back of relatively strong growth (+11.06% YoY) in non-interest income. Interest income, which was pressured – as expected- by low-interest rates, increased only marginally by 1.53% YoY. Also as expected, NIM contracted, albeit slightly, to 9.26% (vs. 9.28% in 2019FY) supported by efficiency in deposit mix. The bank’s non-interest income, on the other hand, was buoyed by FX revaluation and financial instruments trading gains, as fee-based income (net) declined significantly by 14.80% YoY.

Meanwhile, other than the spike in impairment charges, costs were largely kept in check with the cost-to-income ratio at 38.24% (below management guidance of 40%) from 36.11% in 2019FY. The GTBank’s improved CASA mix and low cost of funds (1.19% from 2.30% in 2019FY) helped mitigate the impact of higher OPEX (due to COVID-19 donations and regulatory charges). Ultimately, the bottom line increased by 2.32% YoY to NGN201.44bn.

Impairment charges in 2020FY were significantly higher than expected even after accounting for the impact of the pandemic. According to the 2020FY financial results, impairment charges grew by 298.50% YoY to NGN19.57bn with Q4:2020 accounting for most of the growth.

Management however clarified that the unusually high impairment charge was the result of its assessment of the credit conditions of a particular obligor which necessitated higher provisioning in line with IFRS 9. The devaluation of the Naira during the period also warranted higher provisioning on Stage 2 and 3 FCY loans. Asset quality (measured in terms of NPL ratio) on the other hand improved to 6.39% from 6.53% in 2019FY.

However, this was mainly a result of higher gross loans and advances. We also note that the quality of loans to individuals deteriorated sharply to 9.24% from 4.85% as of 2019FY. Nonetheless, the GTBank maintains a strong cover for its non-performing loans with a coverage ratio of 128.73% (vs. 126.58% in 2019FY).

Although more needs to be done by the bank in order to bring the NPL ratio within prudential limits, we do not envisage any material deterioration on asset quality over the near term given its robust risk management framework and general improvement across vulnerable sectors such as Oil and Gas, Retail and SMEs.