Nigeria's newly formed financial holding company, GTCO, reported a 14% yoy drop in FY 21 after-tax profits, slightly better than our forecast of a 17% decline. As expected, lower net interest income was a major reason for the profit decline, as GTCO has a large proportion of low-yielding special bills sitting in its investment securities book.
Although GTCO, alongside other Nigerian banks, is pursuing strategies to diversify away from interest income sources (evident by the 68% jump in GTCO's e-banking income), interest income is still a significant source of total revenues at 57% (60% on average for our coverage). In line with the profit slowdown, GTCO’s profitability metrics dropped significantly, with ROE at 20.7% (FY 20: 27.1%) and ROA at 3.3% (FY 20: 4.6%). Nevertheless, it remains one of Nigeria's most profitable banks – it is the second most profitable bank in our coverage by ROE, and first by ROA.
We reiterate our Buy recommendation on GTCO with an unchanged 12-month target price of NGN35
GTCO remains one of our top picks (alongside Zenith) due to:
The group's best-in-class operating efficiency, which puts it ahead of peers.
An attractive funding mix.
Strong capital ratios that support loan growth, even as Basel III approaches.
Its recent transition to a holding company, which is positive for new streams of income and improved profitability in the near term.
We have a Buy recommendation on GTCO, with a target price of NGN35, translating into an expected total return of 45%. GTCO is currently trading at a 4.3x FY 21 PE and 0.87x tangible PB, a premium to the average 4.1x FY 21 PE and 0.57x tangible PB for our Nigeria banks coverage.
FY 21 results overview: Key positives
Higher non-interest income: The group’s non-interest income for FY 21 outperformed our estimate (15% yoy growth vs 8% expected). But this beat was due to other operating income such as 'discounts and recoverables' (up 70% yoy) and the absence of a modification loss in FY 21 (FY 20: -NGN3bn). We expect to get more clarity at the management call on the nature of these line items, to determine if they are sustainable going forward.
Lower loan impairment charges: GTCO’s net cost of risk fell to 0.1%, from 0.9% in FY 20. Asides from a larger scale of loan recoveries made during the year, the group took lower provisions on loans, given the improved economic prospects, particularly on oil and gas loans.
Capital adequacy: The group’s capital adequacy ratio (based on the full impact of IFRS 9) remained stable qoq at 23.8%, despite the increase in risk assets. GTCO has the highest CAR in our coverage, made up of mostly tier 1 capital, which is a key plus when Basel III guidelines become effective.
Key negatives
Lower net interest income: GTCO’s net interest income fell 13% yoy, ahead of our expectation for a 16% decrease. The major cause was lower yields on investment securities, as GTCO has 43% of its total investment securities in the low-yielding special bills (NGN560bn). By our calculations, the asset yield on investment securities fell from 10.4% in FY 20 to 5.5% in FY 21.
Operating costs: The cost/income ratio worsened to 42% from 37% in FY 20, as a result of higher regulatory costs (AMCON and deposit insurance premiums), higher ICT expenses (which are dollar-denominated and worsen with depreciation) and staff welfare expenses. However, it remains the lowest in the banking industry. GTCO, as well as its peers, are at risk of further deterioration in operating efficiency given the inflationary pressures within their markets of operations, as well as rising energy prices.
High taxes: Similar to Zenith, GTCO also recorded higher taxes, up 49% yoy, due to lower tax-exempt income as well as higher taxes paid in its foreign jurisdictions. This brought the group’s effective tax rate to 21%, compared to an average of 15% for the past five years. We expect GTCO’s tax rate to continue to be around c20%, given the removal of tax exemption on treasury instruments effective in 2022.
Asset quality: The group's NPL ratio ticked up to 6.0%, from 5.8% in 9M 21. Its provisions coverage (excluding regulatory reserves) fell to 73%, from 79% as at 9M 21. GTCO's NPL ratio still remains above the CBN's prudential limit of 5%.
GTCO now has an asset management and pensions subsidiary
Post the reporting period, GTCO completed a 100% acquisition of two businesses: Investment One Pension Managers Ltd and Investment One Funds Management Ltd. These are the same subsidiaries that GTCO sold off in 2011 to Investment One, when Nigeria abolished the universal banking model and banks had to shed their non-banking businesses.
Based on our analysis, the acquired subsidiaries are much smaller in terms of assets under management (AUM) and market share than other banking-affiliated competitors (Stanbic, FBNH, FCMB). However, opportunities for expansion remain if the subsidiaries can successfully leverage GTCO’s reach. We expect management to divulge more information about the deal at its upcoming investor call.
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Nigeria's GTCO acquires Investment One's pension and asset management businesses, February 2022
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