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Nigeria: Guaranty Trust Bank’s holding company can lift profit, analysts say

By David Whitehouse
Posted on Friday, 18 June 2021 11:49

People gather at Guaranty Trust Bank as authorities ease the lockdown in Abuja, May 4, 2020. REUTERS/Afolabi Sotunde

Guaranty Trust Bank (GTB), Nigeria’s biggest bank by market value, is close to obtaining regulatory approval for a holding company structure, which analysts say will lift profitability.

A GTB spokesperson told The Africa Report that the bank is in “the concluding stage of the approval processes” for the holding company, without giving a final date. The structure, initially due by the first quarter of this year but set back by COVID-19, will allow GTB to combine banking, payments, asset management and pension fund businesses in a single holding company.

A declining earnings contribution from core banking and the country’s underserved asset management and pension markets are pushing Nigeria’s banks to diversify via holding companies. According to McKinsey, the proportion of earnings at the country’s top 10 banks generated by core banking dropped from 85% in 2009 to 65% in 2019.

Banks such as Stanbic IBTC Bank and FirstBank adopted holding companies after regulators in 2011 told banks they had to separate or divest their non-banking businesses. More recently, Sterling Bank and Access Bank in 2020 obtained regulatory approval for holding companies.

“Other companies have built up a running lead, but I am fairly certain that the leadership of GTB possess the capabilities to close the gap,”  says Joshua Odebisi, a financial services analyst at Vetiva Capital in Lagos.  The bank should be able to expand market share, especially in payments, asset management and pensions, he adds.

The structure will allow GTB to leverage its brand to capture market share in financial services outside of banking, says Ibrahim Shelleng, managing director at Credent Investment Managers in Abuja. “With the financial muscle they possess, they would be able to diversify into other financial services, attract the best talent and boost their profitability.”

Stock Valuation

Analysts are positive on GTB’s stock.

  • There is “a lot of headroom for value appreciation” as the company has a return on equity of 27% and while the shares trade at book value, says Odebisi at Vetiva.
  • The firm has a target price of 42.60 on the shares, versus a June 17 closing price of 28.55.

The implementation of the holding company structure is an “upside risk” to earnings forecasts, analysts at Chapel Hill Denham wrote in a note on June 15.

  • The firm, which rates the shares as a “buy” predicts that earnings per share (EPS) will increase 7.2% in 2021.
  • Higher dividends may also be on the cards. Chapel Hill Denham predicts a dividend of 3.34 naira per share, giving a yield of 11.6% and dividend cover of 2.2 times.

Ronak Gadhia, director for sub-Saharan African banks research at EFG-Hermes, sees strong potential for growth driven by GTB’s digital platform.

  • In a research note in April, he increased his 2021 forecast for net interest income by 21%, and his 2021 EPS forecast by 24%.
  • EFG-Hermes rates the stock as buy with a target price of 40.1 naira, even though the firm has “low conviction” for Nigerian equities as a whole due to currency risks.

Size or Speed?

It takes a “particular level of scale” for a bank to maximize returns from a holding company, says Odebisi at Vetiva. He sees Zenith as the only other bank for which it would be viable. Second-tier banks, he says, won’t be able to maximize holding company returns and will need to make strategic acquisitions.

Holding companies are a solution to an old problem – but COVID-19 and new digital entrants into banking are new challenges. According to McKinsey, most Nigerian consumers expect to increase their use of digital and mobile banking services even after the pandemic is over. “Fintech has been a game changer, allowing smaller industry players to make huge gains with a fraction of the overheads of commercial banks,” says Shelleng at Credent.

Ikechukwu Iheanacho, CEO of Voyager Investments in Lagos says that digital banks are challenging the Nigerian status quo.

  • Regardless of holding company arrangements, “if more people shift towards purely digital banks, GTB will lose market share and may no longer be the most efficient,” he says.
  • Furthermore, asset management and pension fund management are “a different playing field. It remains to be seen how GTB will penetrate that market” and whether the expansion will add to earnings, Iheanacho says.

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