Seven months after transitioning into a holding company, GTCO has 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.
The Investment One businesses are relatively small
Based on data from Nigeria’s Pension Regulator (PENCOM), Investment One's pension business controls c0.2% of total pension assets under management (AUM), which is smaller than the pension subsidiaries of GTCO's peers – Stanbic (37%) and FCMB (4% – including AIICO). Although GTCO has not disclosed the key numbers, we estimate the AUM of the new pensions business to be cNGN24bn, compared with Stanbic's NGN4tn and FCMB's NGN677bn. The pension business's FY 20 with the regulator also showed it had an ROE of 3%, less profitable than Stanbic Pensions (at 34%) and FCMB Pensions (25%).
For the asset management business, based on the total asset size of Nigeria's regulated mutual and exchange-traded funds, Investment One Funds management accounts for 1.7% (NGN24bn). Stanbic Asset Management remains the clear leader at 44% (NGN692bn), followed by FBNH's asset management division at 16% (NGN221bn). However, these include only collective investment schemes (mutual funds, ETFs), not separately managed accounts.
We believe the deal consideration is cNGN4bn
Although core details of the transaction such as the acquisition price, AUM of the two entities and the size of the customer base, have not been disclosed, we benchmark the deal against FCMB’s recent acquisition of AIICO pensions managers. FCMB secured a 60% stake in AIICO for NGN6.8bn, implying a total equity value of NGN10.3bn. Given AIICO’s AUM of NGN147bn (at the time of the deal), the implied equity value/AUM ratio was 7.7%.
We estimate the total AUM of Investment One’s pension and asset management businesses to be cNGN50bn (based on pension assets and mutual funds). Using the implied equity value/AUM ratio, that puts the deal consideration for Investment One's two businesses at cNGN4bn, which can easily be financed from GTCO's FY 21f earnings (2.3% of our forecast for GTCO FY 21 profits). We expect further clarity from the management when the deal's details are made public, possibly at the FY 21 earnings call in March.
Opportunity for expansion remains if the subsidiaries can successfully leverage GTCO’s reach
The main reason Nigerian banks are pursuing holding company structures (holdcos) is to access new markets where they have strong competitive advantages. The new subsidiaries can leverage GTCO’s existing branch networks and large customer base (24mn as at end-H1 21), thereby enhancing cross-selling opportunities.
As we discussed in our 2022 outlook report, there are several headwinds to traditional banking in Nigeria, such as the punitive cash reserve ratio (CRR) debits, compressed margins, the incoming Basel III requirements and the growing threat from fintechs. These realities push the banks to develop higher-margin and faster-growing businesses, such as fintechs and asset management segments, as these alternative business lines are at a younger growth stage than banking in Nigeria, have capital-light operations and offer long-term growth potential.
That said, we expect GTCO to face competition in the pension space, as the top 5 and top 10 players account for 66% and 87% of total pension AUM, respectively, and Investment One Pension does not belong in either category. In the short term, we expect the contributions of these businesses to be marginal, given the larger size of GTCO’s banking subsidiaries. We also believe the group might go after more pensions and asset management acquisitions, to rapidly build scale.
GTCO is a top stock pick in our coverage
Across our Nigerian coverage of eight banks, GTCO is one of our top picks (alongside Zenith), for several reasons:
The group has one of the most attractive funding mixes among the Nigerian banks that we cover, which should limit the expected pressure on funding costs from the central bank's CRR debits.
It also has the best operating efficiency in our coverage.
GTCO's share price has taken a hit and was the worst-performing in our coverage in 2021 (-20%), due to a 10% decline in profits. We believe its current relatively low share price provides an attractive entry point for investors.
GTCO also has a high dividend yield, as well as solid liquidity, capital and leverage ratios, which partially shields it from the changes the Basel III guidelines will bring.
Nigeria Banks in 2022: Neither the best nor worst of times, February 2022
Nigerian banks are pushing into fintech and digitalisation to survive, January 2022
The Nigeria banks best placed for Basel III implementation, October 2021
Nigeria banks intensify search for new growth engines, July 2021
How Nigeria’s banks are hunting for the next pot of gold, October 2020