Share of GTCO one of Nigeria’s most profitable banks fell to its lowest in about 5 years trading below N17 per share on Friday, October 7th, 2022.
The stock opened the month of October with a share price of N17.8 per share after falling by 10.5% in the month of September. The stock continued its free fall following several headwinds that have affected banks in the last few weeks.
A major headwind has been the CBN’s decision to increase banking sector cash reserve requirements as well as increase monetary policy rates. These twin decisions are seen as potential headwinds for bank profits. But while these are more recent issues, GTB has seen its share price fall by a whopping 40.5% in the last year, a fall that started soon after it transited to a holding company. So why the fall?
GTB has over the years led the banking sector in terms of profitability growth, cost-efficiency-driven margins, high return on average equity, and consistent dividend growth. However, since 2019, growth in profits has stagnated as the bank faced stiffer competition and interest income dips. The N103 billion reported in the first half of this year though 11% higher than the N93 billion reported in the first half of 2021 is still below the N115 billion reported same period in 2019.
Much of this is due to the macroeconomic environment and more importantly competition from its peers in its main segment, the lending business. The bank’s loan growth between 2019 (H1) and 2022 (H1)is below 50% compared to Access Bank, Zenith, FBN, and UBAs, 153%, 94%, 67%, and 63% respectively. GTB is a conservative bank when it comes to lending and before the covid year had relied a lot on fixed-income securities to augment net interest income. With interest rates in fixed-income securities falling over the last two years, GTB has since been experiencing margin dips.
The cost-to-income ratio which has traditionally been the bank’s holy grail is also facing a decline and at 49% this half year, it is bothering at the 50% mark accustomed to its competitors. The operating cost has increased across the country thus expecting the bank to continue to run a very lean cost line amidst rising inflation is not possible. Operating at 49% is still remarkable considering how expensive it is to operate branches.
But these headwinds do not justify the free fall of the bank’s share price.
While GTB profits may not be growing as fast as they used to, it still delivers one of the highest returns on average equity in the entire stock market. In the first half of this year, annualized pre-tax return on average equity was 23.9% and 18% when adjusted for tax, still one of the best in the sector. Other indicators such as its capital adequacy ratios (22%), liquidity ratios (38.8%), and NPL (6.2%) ratios are also well above regulatory targets.
GTB is also undergoing a major transformation in line with its transition to a holding company. The bank has made huge bets with the acquisition of Investment One Pension Funds to form GT Pension Managers, the launch of its flagship payment service business HabariPay which released the SquadPOS payment product all position to the bank to create an ecosystem that could retain its loyal customers within its banking services, payment options, savings and investing for the future product. The bank is also at the forefront of digital services and is well-equipped to brave the odds.
This makes purchasing this stock which is trading at a price-to-earnings ratio of just 2.8x a major steal. At this PE ratio, it means a share you buy gives you a 36%% earnings yield compared to the company’s return on equity of 18% which the bank printed. The bank last year paid N3 in total dividend per share which at the current price also places the yield at a whopping 17%.
It is likely that the share price might fall further but this is not because of fundamentals. The bank like most stocks is facing sell pressure from investors worried about the macroeconomic challenges. The forthcoming elections are also weighing on the minds of investors. They also have one eye on the fixed-income market which could see yields rise as the central bank’s monetary policy rate hike takes effect.
Buying this stock is for the long haulers with money they don’t need to worry about till at least next year. It is very likely that there will be a post-election bounce next year if the election goes well. Those who make hay while the sun shines stand to harvest most.
Going by past performance of the bank, I would agree with this article, that the stock is a ‘steal’ at the current price. However, I am not always very comfortable with business leaders who hang around under any pretext, remaining in the spotlight as if there’s a shortage of competent hands in the organisation. It can also be out of sheer megalomania, although I strongly hope this is not the case here.