What Drives GTB Superior Value Creation?

March 25th, 2015

What actually drives GTB superior value creation above its peers in this industry?

This is the question that has continued to bother some analysts as well as investors in the Nigerian financial clime. What are the core competences that have given this bank an edge over the rest? In 2012, Renaissance Capital , RenCap, a unit of the Russian investment bank controlled by billionaire Mikhail Prokhorov with specialty on emerging markets, in an analytical report titled ‘Battle of banking giants gave GTB a premium rating. It backs its view that GTB is a better business that has created tangible cumulative value over a period of time. ‘’For long-term investors seeking the best-in-class in terms of delivery, we believe GTB is still the best entry point into the Nigerian market. We believe its superior value creation justifies the premium rating. “, RenCap declared.

To arrive at this conclusion analysts at the Renaissance Capital Limited (RenCap) embarked on an Economic Value Added analysis, EVA. Economic Value Added (EVA) is important because it is used as an indicator of how profitable company projects are and it therefore serves as a reflection of management performance.The idea behind EVA is that businesses are only truly profitable when they create wealth for their shareholders, and the measure of this goes beyond calculating net income. Economic value added asserts that businesses should create returns at a rate above their cost of capital.

It broke down the 2012 results of the three leading banks in Nigeria – Zenith Bank, First Bank and GTB, crystallising them into specific ratios and delivering an opinion on the performance of each bank based on given parameters.

RenCap analysts said Guaranty Trust Bank outperformed its other two peers in returns at 34 per cent, compared with Zenith’s 24 per cent and First Bank’s 18 per cent. In that year GTB’s superior returns were driven by:

1)  Better gross yields
2)  A lower-than-peers impairment charge
3)  A lower cost base returns

GTB outperformed its peers delivering an RoE of 34% vs Zenith’s 24% and First’s 18%. From an absolute perspective, GTB created NGN41bn of value in 2012 against First’s NGN1.4bn and Zenith’s NGN25bn (or NGN11.5bn on a normalised tax rate). According to the analysts all the three banks created value in the financial year 2012, although First Bank only marginally .

“ We completed an Economic Value Added analysis ,EVA, of last year’s result to estimate the absolute naira value creation by each bank. We measure value created as the excess return over the Cost of Equity, CoE, as a percentage of the average equity for the bank. GTB produced the highest excess return – at 16% vs Zenith at 6% and First at a marginal 0.3%. If we normalise Zenith’s tax rate to c.15%, its returns drop to 20.3%, implying an excess return of 2.7%. From an absolute perspective, GTB created NGN41bn of value in 2012 against First’s NGN1.4bn and Zenith’s NGN25bn (or NGN11.5bn on a normalised tax rate)” RenCap explained further .

The analysts identified high cost of funds as a major challenge facing most banks in the country.Just as most banks in Nigeria, the three tier one banks’ funding costs came under pressure in their respective 2012 financial reports, the analysts said. .However ,“compared with full year 2011, GTB saw the least deterioration with funding costs up 40 basis points versus First Bank, which was up 70 basis points and Zenith up 130 basis points,” it said.

Commenting on banks’ loan growth, the report described 2012 as a disappointing year in terms of the sector’s loan growth.“Real Gross Domestic Product (GDP) of 6.5 per cent in 2012 and inflation of 12 per cent imply that nominal GDP growth was above 18 per cent. Against this figure, the growth achieved by most of the banks was disappointing as it lagged nominal GDP.

“All three banks enjoyed margin gains on the back of higher lending rates and good yields on fixed income securities and Asset Management Corporation of Nigeria’s (AMCON) bonds for most of the year. GTB had the highest success in expanding its asset margins, which, on our numbers, increased 210 basis points over the course of the year,” it added.

However, RenCap adjudged GTB as the bank among the three Tier 1 banks that created the highest value for investors in 2012.“On the cost side, again we would argue that GTB has established a competitive advantage in the absence of more severe cost controls by First and Zenith. While we think Zenith did an excellent job in containing costs in 2012, we believe the bank needs to take additional cost reduction measures to effectively lower its Cost Income Ratio (CIR) to below 50 per cent,’’ the RenCap analysts said.

GTB however did not only show superiority in 2012, since 2004 the analysts noted ,”we note that in some years, the banks created no value, and in fact destroyed value. GTB had negative value creation in FY09 when its RoE fell to 13%, about 5% below its CoE. Aside from that year, GTB generated value each year. Zenith and First fared worse. For four of the nine years, the two banks delivered negative value creation. On our numbers, Zenith delivered its worst performance in FY09 with an RoE of 6%, hence a negative excess return of c. 12%. FY09 was also First’s worst year as it delivered a negative excess return of 16%. On a cumulative basis, we note that only GTB has delivered a positive total over the past nine years. The negative returns delivered by First and Zenith in some years have more than offset the gains achieved in other years. That said, Zenith has fared better than First.
GTB also confirmed it is a consistent leader in 2014 again . The bank thrives through the year 2014 having enjoyed investors’ better price approval and trend as high as N31.60 by the seven month of the year.

This price was defended through on the strength of the final dividend of N1.45 for 2013, interim of 25k and final of N1.50 bringing the total dividend to N1.75 dividend in 2014. The bank’s management has demonstrated professionalism in managing a world-class bank in all facet to ensure steady growth in terms of profitability and dividend payment. The bank stood tall in the pre and post economic meltdown crisis that led to various reforms in the banking industry which boosted its customers and deposit base with high patronage by the banking public.

The bank has remained strong in the industry as a result of solidified operations and branch networking through ICT driven banking products and efficient customer service delivery. The bank’s giant effort was clearly revealed in the numbers released in the past five years at the exchange.

Investors, on the other hand, were not blind to the outstanding performances from the bank as they took strategic positions to partake in the dividends reeled out which moved the price of the stock on NSE. Similarly, the book value has grown in the same direction to N12.72 from N8.97 recorded in 2010, investors’ confidence complimented its price as valuation tools placed the bank’s stock at N38.

Investment Analysis

Investment analysis of GTBank stock between 2010 and 2014 showed an improvement in share price from the 2010 opening price of N15.50 to low of N12.30 in 2011 as at October 7, and then all high of N31.80 in June 2014 but now trading N22.90 after adjustment for the final dividend of N1.50 for the financial year ended Dec. 31, 2014. Its earnings per share for the period was up as a result of great cost and risk management of the bank regardless of increase in its non-performing loan. The earnings power grew from N1.63 in 2010 to N3.35 in 2014 representing an increase of 106 percent.

However, the EPS was up consistently throughout the period under consideration as shown in the table above. When the bank paid a dividend of N1.70 kobo to its shareholders in 2013 which is 0.05 kobo increase to N1.75 declared for 2014 from N0.75kobo per share in 2010 representing 133 percent growth in just five years.

The bank latest earnings revealed better performance than the past considering 2014 challenges experienced by the banking industry. The bank profit margin has been sliding down to reflect operational cost increment as the bank managed increasing customers’ base and control cost to create value for its customers and shareholders with improved innovative banking products.

The bank seems to have led the industry unchallenged by any other bank except Zenith Bank .Critically, looking at the bank’s performance for the last five years showed that the bank has consistently enhanced its performance as reflected in its profitability ratio within the review period. Its gross income during the period grew by 81.06 percent from N153.91 billion in 2010 to N278.67 billion, while profit after tax (PAT) rose by 157 percent to N98.69 billion from N38.35 billion posted in 2010.

The profitability level has steadily grown to support share price placing the bank among the top three banks in terms of profitability, asset, margin, service delivery and risk management in the industry today. Under the period of five years, the risk and cost management of the bank had improved tremendously as shown in its profit margin that moved from 24.91 percent in 2010 to 35.44 per cent after it had hit 38.21 percent in 2012.

The bank’s prudent management led to enhanced value creation to all its shareholders and other stakeholders. The nature and complexity of the risks in its business requires strong and robust risk management structure to provide adequate oversight at all levels. The earnings power of the bank remained strong at 335 kobo regardless of the banking industry reforms, over regulation, high Monetary Policy Rate, tight liquidity, falling crude oil price, dwindling external reserve and falling naira value at the exchange market.

The bank’s 2014 full year earnings per share of N3.35 was beyond analysts and market players expectations as market expected that non-performing loan resulting from the falling oil price would impact negatively on the banks profitability. The bank’s total assets per share and book value per share stood at N80.05 and N12.72 respectively.

Prospect in the Bank

The expected relative stable macroeconomic outlook after election will favour the bank as volume of transactions has increased with the cashless economy due to its formidable IT driven banking products. Its recent IFC loan to boost lending to its tilling customer as its retail banking service has complemented other banking products and service mix to enhanced profitability and drive share price.

The bank ranking among top 500 banks in the world is a plus, the most respected bank in Nigeria today and customer’s choice due to its professionalism and prompt customer service delivery had made the bank the choice of the banking public. Its strong alliances with international financial institutions as an international bank with branches in many countries of the world, sound management with good knowledge and expertise of domestic markets would boost the bank’s future operations.

Similarly, its brand name and good succession plan of the bank assures continuity and the recent re-introduction of ATM transaction fee of N65 are factors that will make the bank thick. Other positive factors are robust risk management framework, increased opportunities in retail banking and infrastructure financing, good track record, good corporate social responsibility initiative and huge financing opportunities in the country especially in the power sector, infrastructure and agriculture.

Weaknesses & Threats

Over regulation of the industry will be the major threat the bank would confront going forward. Also, high operational cost due to infrastructure challenge and high investment in products and services to satisfy its sophisticated customers would be another factor the bank would contend with. Other factors that will put pressure on the bank’s profitability are policy inconsistency, regular increase in cash requirement ratio of the public, private funds, high MPR, tight liquidity, falling naira value, dwindling crude oil price which is affecting the external reserve and the exchange rate.

Valuation

We believe that future expectation validate any projection, consistent gross income and profitability growth on quarterly and yearly basis is our central focus and positive outlook for the bank stock. The bank price earnings ratio stood at 6.73xs, with price to book value ratio of 1.80 and dividend yield of 7.64 percent. Investors with medium and long term goal that want to preserve capital should look the way of this bank stock.

Guaranty Trust Bank Profile

GTBank is a foremost Nigerian financial institution with vast business outlays spanning Anglophone West Africa and the United Kingdom. It was incorporated as a limited liability company licensed to provide commercial and other banking services to the Nigerian public in 1990. It commenced operations in February 1991 and undertook its second share offering in 2004 and successfully gathered over N11 billion from Nigerian Investors to expand its operations.

The bank made a strategic decision to actively pursue retail banking and it embarked on a major rebranding exercise in June 2005, which saw the bank emerge with improved service offerings, an aggressive expansion strategy and its vibrant orange identity. The bank remained tall through all regulations that put the banking sector at its current position in Nigeria. The bank is listed on the London and Nigerian stock exchange (NSE).