GTB: FY 19 earnings call – Focus on cost efficiency

GTB is still one of our preferred names among the Nigerian banks we cover. We reiterate our Buy rating with an unchanged target price of NGN46.00, which now suggests an ETR of 108%. GTB trades on FY 20f PB of 0.9x, in line with frontier peers. This is due to the bank's strong digital and retail banking franchise. Following the release of audited FY 19 results that were better than expected (see our report here), GTB hosted its investor call earlier this week. We summarise some of the key points below. 

Macro environment and stricter regulations not supportive of growth. GTB expects profits for 2020 to be subdued due to the harsher regulatory climate. As such, banks will need to be agile in reacting to headwinds and adjusting to opportunities. In the near term, management will increase focus on cost efficiency, maintaining low funding costs and boosting fee income, while keeping an eye on credit risk.

Pricing wars on loans. Despite a 0.7ppts drop in loan book yield to 15.8% in FY 19, management is prepared to go to the market offering high-quality loans priced below the prevailing rates.

Focus on retail loans going forward. To meet the Central Bank of Nigeria's minimum 65% LDR rate by Q1 20 (60% as at FY 19), the bank expects to grow loans by 13% in 2020. GTB sets itself apart by targeting salaried individuals rather than SMEs, using a deduction-at-source (DAS) type mechanism. Historically, the biggest risk for this class of customers was the diversion of salaries to other banks to prevent payment collection. However, with the introduction of the standing order, which allows banks to pull balances from other banks linked to a customer’s BVN, this risk has reduced significantly. GTB should therefore be able to keep NPLs in check while aggressively growing its retail book.

Push for increased transactions to boost non-interest income. GTB saw good fee and commission income of 19% in FY 19, but it could come under pressure from the introduction of the new guidelines on bank charges. Hence, the bank is poised to ramp up volumes as GTB accounted for 19% of total NIP transfers the year and is looking to push it further, gaining even greater market share.

Better cost containment. Over the past two years, customer count increased by 57% to 18mn, while staff and branches went up 8% and 3%, indicating a reduction in the bank’s cost of service. As current macro conditions do not support impressive growth in the near term, management is looking at implementing new measures to lower operating costs. Although these measures were not explicitly itemised, management assured investors that no staff cuts were on the horizon.

Banks are under increasing competition from fintechs, who are building cheaper, faster and more friendly platforms (we identified many of them in our recent research). To compete with them GTB launched Habari, its payment and lending platform whose profit was up by 60% yoy in FY 19. 

GTB is considering a holding company structure. GTB shed its subsidiaries and became a bank-focused business nearly 10 years ago. However, the changing business dynamics over past few years have necessitated a rethink, as the current bank growth rate of 5-7% is not as attractive as other business areas such as payments, which grew by 60% in FY 19. Also, looking at peers, it noted that some currently enjoy impressive returns from their other business lines in the pensions administration, mobile money, asset management and fintech space. These have prompted GTB to consider a holding company structure to enable it to engage in other financial services with potential for quantum growth outside of the heavily restricted banking sector. This is all subject to shareholder and regulatory approval.

Devaluation a potential pressure point. Management feels that an NGN currency devaluation will likely occur in the near term, considering reserves, oil prices and other macro variables. It said the bank is properly hedged against this occurrence as its net long US$ position stands at US$1.3bn – effectively GTB stands to gain from a devaluation, its oil and gas exposure of cUS$1.5bn (NGN550bn) is adequately hedged over the coming 24 months at US$50. Likewise, GTB’s stress test shows that at a 50% devaluation, CAR (25.6% at FY 19) would still be well above the regulatory minimum. 

Subsidiary growth. Good growth from Ghana (PBT up 37% yoy, accounting for 10% of group profits) is expected to continue in 2020. Expansion in East Africa with a focus on Kenya, Rwanda and Uganda might even be of an inorganic nature – historically GTB has favoured organic growth strategies – as GTB looks to diversify its profit base.

Succession – Current CEO Segun Agbaje is due to step down in June 2020. No succession plans have been officially announced. It was hinted over the call that one of the other five executive directors would likely be the replacement.

Regulations present a major risk as they are unpredictable. A challenging macro environment, resulting in stricter regulations, would mean the banks would need to work harder to sustain current ROE levels via a combination of new income lines and improved operating expenses.