December 1, 2020/Proshare
by FBNQuest Research
3% cut to our 2020-21E EPS forecasts
GTBank’s (GTB) Q3’20 results were in-line. As such, the mid- single-digit PBT growth delivered by the bank underscores its intent to restructure into a holding company (Holdco), flexible enough to allow it pursue opportunities in other fast-growing segments of the financial services sector – i.e. insurance, pensions, etc. If properly executed, the bank’s entry into these fast-growth segments will help diversify its revenue base and drive earnings growth beyond the mid-to-high single-digit range that it is currently delivering. Following its results, we have cut our 2020-21E EPS forecasts by c.-3% on average.
Despite the modest revisions to our earnings forecasts, our new price target of NGN62.6 is 17% higher because we have cut the risk-free rate driving our DDM valuation model to 6% to reflect the compression in government bond yields. GTB’s NPL ratio improved by 30bps q/q to 6.5% despite a 4% q/q reduction in its gross loan book. Its gross coverage ratio is also healthy at 123% and is up c.520bps q/q. Although its liquidity ratio of 38.8% is comfortably above the 30% regulatory minimum, it is down considerably from c.49.3% as of end-2019, mainly because of discretionary CRR debits by the CBN.
Our unchanged PBT forecast for ’20f implies flattish growth y/y at c.NGN229bn, or just c.2% lower than management’s 2020 guidance of NGN235bn. Our revised forecasts translate to an ROAE of 27.4%, in-line with ROAE guidance of >25%. We note that the bank’s current valuation of 1.2x 2020E P/B is still at a considerable discount to its historical mean of 1.8-2.0x. Although GTB shares have rallied in recent weeks on the back of the broad-based market rally and ample liquidity from maturing fixed income securities, since then the shares have shed -13.1% from their peak price (ytd) of NGN38.2 attained on 12 November (vs -0.8% NSE ASI). Consequently, our new price target implies a potential upside of 88% from current levels. We retain our Outperform rating on the shares.
Q3’20 PBT up 5% y/y, driven by pre-provision profit growth and y/y reduction in opex
Q3’20 PBT grew 5% y/y on the back of a 6% y/y increase in pre-provision profit and a 2% y/y reduction in opex. Pre-provision profit growth was driven by a 10% y/y increase in funding income, thanks to a sharp reduction in interest expense. In contrast, non-interest income declined by -2% y/y. Below the tax line, PAT was flat y/y because of a 390bp y/y increase in the effective tax rate to 16.7%.
Sequentially, PBT expanded by 12% q/q following reductions of 39% q/q and 33% q/q in loan loss provisions and opex. However, PAT fell by 27% q/q because of a negative result of -NGN4.4bn in other comprehensive income (OCI) vs. +NGN15.7bn in Q2.