Analyst: Olumide Sole<\/p>\n
4th Quarter Performance
\nGTCO recently released its Q4\u201923 results, reporting a 92% y\/y growth in Gross Earnings to \u20a6336 billion. This was driven by a 90% y\/y rise in Interest Income to \u20a6176 billion (Vetiva: \u20a6175 billion), due to the expansion of the bank\u2019s loan book and effective repricing of its assets. Meanwhile, Non-Interest Revenue (NIR) grew by 99% y\/y to \u20a6154 billion, mainly due to a \u20a6108 billion FX revaluation gain.<\/p>\n
Net Interest Income (NII) saw a 100% y\/y improvement to \u20a6140 billion, despite a 59% y\/y jump in Interest Expense to \u20a637 billion, thanks to a 65% y\/y increase in savings rate on customer deposits. On the other hand, Impairment charges rose by 5.0x to \u20a649 billion, owing to unfavourable business climate exacerbated by policy reforms such as the removal of fuel subsidy and the devaluation of the Naira. These factors have significantly impacted the loan portfolio of banks, leading to increased provisions for potential credit losses. Also, Opex rose 16% y\/y to \u20a667 billion, due to a 36% y\/y increase in staff costs, amid rising inflationary pressures. Overall, this led to a 296% and 344% y\/y increase in PBT and PAT to \u20a6176 billion and \u20a6172 billion respectively.<\/p>\n
FY 2023 \u2013 Full Year Performance
\nFor its full-year performance, Gross Earnings grew by 120% y\/y to \u20a61.2 trillion, owing to growth in Interest Income and NIR which printed at \u20a6551 billion (+69% y\/y) and \u20a6609 billion (+209% y\/y) respectively. Hence, PBT and PAT grew by 185% and 219% y\/y to \u20a6758 billion and \u20a6607 billion respectively.<\/p>\n
Core banking to drive growth in 2024
\nFollowing the hike in the Monetary Policy Rate (MPR) by the CBN this year, and the expansion of the bank\u2019s loan book by 32% to \u20a62.5 trillion in 2023, we expect GTCO\u2019s core banking performance to come in stronger in FY\u201924. Specifically, we see the bank\u2019s Interest Income printing at \u20a6904 billion (+64% y\/y), while Interest Expense is projected to come in at \u20a6191 billion (+68% y\/y), due to the growth in customer deposits and higher savings rate. This yields a Net Interest Income of \u20a6713 billion (+63% y\/y).<\/p>\n
On the flip side, the quality of the bank\u2019s assets may deteriorate, reeling from the effect of several macro headwinds including higher interest rate on loans following the hike in the MPR by 600bps, and inflationary pressures, which are expected to strain businesses and income, making loan repayments difficult for the bank\u2019s customers. Hence, we envisage GTCO\u2019s NPL ratio will come in higher at 4.5% (FY\u201923: 4.2%). Nonetheless, we still expect a strong performance as we anticipate a faster expansion in revenue line items relative to costs.<\/p>\n
Meanwhile, NIR is projected to print at \u20a6693 billion (+12% y\/y), owing to projected growth in Commission and Fees income to \u20a6149 billion (+20% y\/y). Also, we expect the bank to record significant FX revaluation gains to the tune of \u20a6312 billion based on the depreciation of Naira, which we saw in the first quarter of the year; however, we do not expect the bank to record FX revaluation gains in subsequent quarters given that the bank had to close out its Net Open Position (NOP) in compliance with CBN\u2019s guideline.<\/p>\n
CBN\u2019s reduction of Loan-to-deposit ratio (LDR) to improve earnings
\nRecently, the CBN announced its reduction of LDR for Deposit Money Banks (DMBs) to 50% from 65%. We believe this move is geared towards solidifying its monetary tightening stance. For context, with CRR increased to 45% from 32.5% and LDR at 65%, Nigerian banks had little or no assets to allocate to other return-yielding investments asides loans. Thus, the reduction in LDR will free up assets for Nigerian Banks to allocate to other return-generating instruments, such as T-bills, bonds etc..<\/p>\n
Consequently, we expect this policy move by the CBN to reduce CRR debits as the banks find it easier to comply with the reduction in LDR.<\/p>\n
Recapitalisation to spur long-term growth
\nSequel to the CBN\u2019s move to review upward the minimum capital requirements of Nigerian banks to improve their lending capacity, we estimate GTCO\u2019s funding gap at \u20a6362 billion. We posit that the recapitalisation exercise would improve the earnings potential of the bank in the long run. However, in the near term, we expect GTCO\u2019s number of outstanding shares to increase, which would in turn lead to a dilution of shareholders\u2019 equity.<\/p>\n
Issuance of additional shares in motion
\nIn compliance with the CBN\u2019s directives, the bank has announced its intention to raise additional capital of $750 million via the issuance of securities comprising of ordinary shares, convertible or non-convertible notes, bonds or any other instruments. Of note, the bank seeks to issue an additional 15 billion shares to increase its issued share capital. Based on this, we expect the bank\u2019s number of shares outstanding to increase to 44.4 billion from 29.4 billion.<\/p>\n
TP revised to \u20a650.00 (Previous: \u20a644.00)
\nBased on our new projections, we have increased our FY\u201924 PBT and PAT forecast to \u20a6919 billion (+51% y\/y) and \u20a6816 billion (+51% y\/y). However, in line with our expectation of a dilution of shareholders\u2019 equity as result of the bank issuing additional shares, we expect a slight decrease in EPS to \u20a618.04 (FY\u201923: \u20a618.07) per share. Nonetheless, we revise our 12-month Target Price (TP) to \u20a650.00 (Previous: \u20a644.00). GTCO is currently trading at a P\/B ratio of 0.73x and P\/E ratio of 1.88x.<\/p>\n
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