Guaranty Trust Holding Company PLC (GTCO) has announced an offer for subscription, aiming to raise N392,490 billion (net) through the issuance of 9 billion new shares at N44.50 each.
Details of the Offer
The allocation of the Offer Shares is split evenly as follows:
- 50%, corresponding to 4,500,000,000 Offer Shares, to the Institutional Investors.
- 50 % corresponding to 4,500,000,000 Offer Shares, to the Retail Investor.
- The offer opens on July 15 and closes on August 12, 2024
An “offer for subscription” is a type of equity financing where a company issues new shares directly to investors at a fixed price to raise capital.
This increases the total number of shares outstanding, diluting the ownership percentage of existing shareholders, unless they buy new shares.
Historical Performance and Market Capitalization
Upon the announcement of the offer on July 15, the share price experienced an intraday gain of 0.2%, rising above its previous closing price of N45.50.
This immediate, albeit modest, positive response from the market suggests that investors have some confidence in the offer and its potential benefits for the company.
However, despite this gain, the share price is still below its 5-year and 52-week high of N53.05, recorded on April 2, 2024. This indicates that the current market valuation is lower than its peak, and the offer price of N44.50 per share is set at a discount relative to these historical highs.
In 2023, the share price saw a significant year-to-date (YtD) gain of 76.09%.
In the current year, the share price has continued to perform relatively well, with a 12.59% YtD gain compared to the banking sector’s average YtD decline of 1.89.
This continued upward trend has elevated GTCO’s market capitalization to N1.342 trillion, making it the most capitalized bank.
That said, overall, the primary concern for shareholders is to evaluate the strategic advantages of participating in the offer and the impact of the additional funds on financial stability and potential for future growth.
According to the bank, the essence of the offer on a broader term is for the recapitalization of GT Bank Nigeria and for the growth and expansion of the group, including acquisitions in Pension Fund Administration and Asset Management businesses.
Specifically, the bank stated that the proceeds will be allocated as follows
- 4% (N138.500 billion) for branch network expansion; new branches in Nigeria and outside Nigeria and acquisition of hardware and freehold improvement.
- 6% (N98.500 billion) for technology infrastructure upgrade.
- 9% (N133 billion) for lending to key business segments.
These plans have the potential to enhance the bank’s financial health and bottom line, provided that the funds are effectively and efficiently used as highlighted.
In 2023, the bank’s capital adequacy ratio declined to 21.94% from 24.08% in 2022, below the year’s target guidance of 23%. Looking forward, the bank aims to achieve a CAR of 24.50% in 2024. Using the proceeds for recapitalizing may help the bank achieve the target CAR.
Also, the allocation of a significant portion of the proceeds to lending is expected to increase the bank’s lending capacity, potentially altering its cautious approach to lending.
In its 2023 results presentation, the Group noted that it adopted a cautious approach to loan growth due to uncertainty in the operating environments of the jurisdictions where it operates.
Net loans increased to N2.48 trillion in 2023 from N1.89 trillion in 2022, representing a 31.5% growth (2.4% without accounting for devaluation).
This comparatively low loan growth highlights the potential impact of the additional funds on the bank’s lending activities
However, the bank must carefully manage the associated risks, particularly the potential increase in NPLs and impairment allowance for NPLs
Recent trends highlight this necessity. The bank stated in the offer prospectus that impairment allowances for NPLs decreased from N57.5 billion in 2021 to N54.9 billion in 2022, before rising to N63.5 billion in 2023, largely due to a weakened macroeconomic environment driven by lower oil prices and the devaluation of the Naira.
Additionally, the financial statements show that the Group raised its loan impairment charges to N103.0 billion in 2023 from N12.0 billion in 2022, preparing for adverse economic changes and currency fluctuations, particularly related to investments in Ghanaian sovereign securities and other contingencies
The high impairment losses moderated the growth in net interest income after impairment loss to 36% YoY to N333.743 billion in 2023.
Overall, the cost of risk increased from 0.62% to 4.49% in 2023, indicating rising credit risk and potential loan losses
The Group’s enunciated risk management may be reassuring as it intends to continue following a prudent credit risk approach whilst managing its asset quality, which is underpinned by strong underwriting and selectively grow its loan portfolio by observing a prudent risk appetite.
Also, the Group has provided a moderate 0.8% cost of risk guidance for 2024.
Careful management will be necessary to achieve this target and mitigate its impact on profitability and overall financial health, especially with expected expansion in loan portfolio.
Additionally, its sustained strong performance across most key growth metrics also makes a case:
- Net Interest Income: Increased by 68.41% to N436.697 billion from N259.303 billion in 2022 and further surged by 177% YoY to N227.300 billion, more than half of the 2023 total figure.
- Pre-Tax Profits: Pre-tax profit hit N509.349 billion in Q1 2024, about 84% of the 2023 pre-tax profit of N609.308 billion.
- Return on Equity: Post-tax return on equity increased to 44.82% in 2023 from 18.65% in 2022.
Takeaways for Shareholders and Investors
Perceived Discounted Offer Price: The offer price of N44.50 per share is below the recent high of N53.05, presenting a discounted entry point for investors. This can be attractive for both existing and new investors looking to capitalize on potential share price appreciation.
Attractive Valuation: The stock is currently trading at a price-to-earnings (P/E) ratio of 1.35x, lower than the banking sector average of 2.91x. This suggests that GTCO is undervalued compared to its peers, offering a potentially attractive entry point for investors.
Growth Potential: Analysts project that GTCO’s EPS will reach N25.01 in 2024, about 32% higher than the 2023 EPS. This anticipated growth supports the potential for future returns.
The stock has a low price-to-earnings growth (PEG) ratio below 1x, indicating it is undervalued relative to its earnings growth potential. This suggests attractive growth at a reasonable price, appealing to growth-oriented investors.
