GT Bank has a history as one of the most efficient banks in Nigeria. It is also the gold standard in terms of corporate governance in Nigeria, and the first Nigerian company to switch to the IFRS format. The company released its audited half year results, and also hosted a conference call last week. We will take a look beyond the branding and try to understand the internal workings of this bank. [upme_private]
The bank grew its revenues by 7.1% between June 2013 and June 2014 from N124.202 billion to N132.985 billion. This growth was largely driven by the interest income as the other income (made up of fees, commissions, etc) grew by only 1.9% from N31.711 billion N32.301 billion. The other income was squeezed because of the reducing COT in the economy and the charges that the banks had to bear as customers were allowed to withdraw from other ATM machines for free.
The net interest margin took a hit, dropping from 16.3% to 14.0%. This happened largely because of the high Cash Reserve Ratio (CRR), which the CBN raised to 75% for public sector funds and 15% for private sector funds. The “cash squeeze”, which led to idle funds in the coffers of the Central Bank of Nigeria, led to a squeeze in interest margins. Additionally, GT Bank were also forced to write off some loans in the second quarter of the year, which saw the loan loss provision rise by 287% from N1.318 billion to N5.105 billion. This flowed into the bottom-line and the net profit ended up dropping by 6.9% from N57.364 billion to N53.397 billion. We expect that the results from GT Bank will improve going forward, since the loan loss was a from of an extraordinary item with some chances of write-backs.
GT Bank experienced a loan growth of only 3% from N1.008 trillion to N1.039 trillion. I am forced to say that is a heck of a lot of money right there. We are talking in terms of trillions of Naira with GT Bank. However, loan to deposit ratio dropped from 69.9% to 62.2%, which means that the bank still has some head room to grow loans from its deposit base. The cash flow from operations rose as a proportion of profit before tax rose from 86.3% to 104.9%; the quality of earnings of GT Bank is not in doubt.
Profitability took a hit because of the loan loss provision as net profit margin dropped from 39.5% to 33.1%. The bank also struggled with efficiency as asset turnover also dropped from 0.15 to 0.12. But GT Bank countered these problems by raising its leverage ratio from 5.71x to 6.56x. At the end of the day the return on equity dropped from 33.8% to 26.6%; that was a massive shave off in profitability.
While the bank was able to deliver good results and high quality earnings, it suffered pressures from a massive loan loss provision, reducing commissions and fees, and a cash squeeze as the CBN raised CRR. GT Bank remains a well run bank. But the question remains… is the current stock price worth it?
At the current price of N29.90, GT Bank is selling at a price to earnings (PE) ratio of 10.0x, price to book value of 2.7x, a dividend yield of 5.4% and price to operating cash flow of 9.34x. GT Bank is selling at a premium because of its superior return on equity. Using a proprietary combination of relative and fundamental methodologies, GT Bank has a fair value of N24.83 per share, which means the stock currently has a downside of 17.0% from current levels.
For people like me who are looking for real value, I’d say sell, and move on. There are better stocks out there.
The author, Manasseh Egedegbe CFA is a seasoned Financial Analysts and an Executive Content Partner with Nairametrics. You can visit his personal blog below;