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GT Bank Plc - A rebound in earnings in the near term

• Following the FY 2020 conference call held on Monday, we have revised our numbers for GTB. Key focus at the call were update on the Holding company structure, loan book, interest rate expectations and expectations of revaluation gains. We have made some adjustments to our FY 2021 forecast for GT bank following clarification at the call. We raised our FY 21E non-interest revenue to reflect our expectation of higher net fee income and foreign exchange revaluation gains. In addition, we made an upward adjustment to interest income to reflect the current rate environment. The impact of these adjustments takes our PBT to N261.7 billion and EPS of N7.57 (+11% YoY) over 2021. Hence, we revise our recommendation to a STRONG BUY rating on GUARANTY, with a revised FVE of N42.21, with an upside of 36%.
• Key highlights from the conference call were management guidance for loan growth and strategy for its holdco structure. Management guided to a 10% growth in loans over 2021. On the holding company structure, management noted that while the Covid-19 pandemic slowed the process of the completion, they are at the final stage of approval. Hence, management expects to run a Holdco for at least half this year – 2021. On diversification of earnings, one of the highlights mentioned was the bank’s strategy to focus on retail PFA business, leveraging on its strong retail presence. In addition, management intends to venture into asset management and payment business. Meanwhile, management expects 25% growth in deposit, 35% cost to income ratio, 8% net interest margin (NIM) and cost of risk and NPL ratio (coverage ratio above 100%) of 1% and 6% respectively. Overall, management guided to PBT growth of 2% to N243 billion in FY 21(2.8% YoY in FY 20).
• NIR to command earnings story. Over FY 2020, GT bank benefited from the impact of FX devaluation, particularly on its long US$1.15bn position (Ex-US$613mm SWAP positions). Hence, the bank recorded a growth of 8.9% YoY in Non-Interest revenue against the backdrop of foreign exchange revaluation gain (+232% YoY) and trading income (+17% YoY). For us, we expect further revaluation gains as recent movements in Naira at the IEW (Q4 20: N389.3/$ vs Q1 21: N401.9/$ on average) signals room for revaluation gains in 2021. Meanwhile, we expect the recovery in net fee and commission income (+18% YoY), as the base effect – a fallout of CBN revised bank charges implemented in January 2020 – filters out.
• A rebound in earnings in the near term. Net impact of our overall adjustment translates to PBT of N261.7 billion and EPS of N7.57 (+11% YoY) over 2021. Hence, we revise our recommendation to a STRONG BUY rating on GUARANTY, with a revised FVE of N42.21 (from N36.16) due to i) expectation of higher growth in net loan book forecast by 9.7% YoY (previously: 5.6%) and upward revision of interest income by 2.8% YoY to N309.1 billion (previously: N301.4 billion) and ii) upward revision of NIR by 16% YoY to N172 billion (previously: N151.3 billion).
• GUARANTY trades at a current P/B ratio of 1.14x, at a premium to its one-year average of 1.08x and a discount to its five-year historical average of 1.56x. Also, it is trading at a premium compared to ZENITH’s PB of 0.62x, which is justified given GUANRANTY’s strong and sustainable ROAE (GT bank FY 20: 26.8% vs ZENITH FY 20: 22.4%). At current price of N31.05, our expected dividend of N3.09 over FY 21E translates to a dividend yield of 10%.

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