Guaranty Trust Holding Company (GTCO) is one of the leading financial institutions in Nigeria and one of the five largest commercial banks in the country, also known as FUGAZ.

The year 2023 was a fantastic year for the tier 1 bank, with the share price gaining 76% and closing at N40.50.

The year 2024 has not been as sizzling as 2023; however, it is up 16.74% year to date and is one of the best-performing FUGAZ stocks this year, closing last week at N47.35 per share.

 This elevated the market capitalization to N1.39 trillion, ranking it as the most capitalized banking stock.

Despite currently trading below its 52-week high of N53.05 (reached on April 2, 2024), GTCO is still above this year’s average price of N42 and its 5-year average of N28.

This performance suggests strong investor confidence and positive sentiment towards the stock, primarily based on its financial performance.

Financial Performance Driven By Strong Fundamentals

The group reported a pre-tax profit of N609.308 billion in 2023, a significant increase from N214.154 billion in 2022. In the first quarter of 2024, the bank’s pre-tax profit surged by 587% year-over-year to N509.349 billion, already exceeding half of the 2023 total.

Commercial banks are not only rated for their bottom-line performances, especially from a regulatory standpoint. One of the most important regulatory prudential ratios is the capital adequacy ratio (CAR), which the central bank set at 15%.

GTCO surpasses this, posting a CAR of 21.08%. The bank has set a target of 24.5% in 2024, indicating a proactive strategy to strengthen its financial stability and resilience against potential losses.

Additionally, the bank has proposed a N500 billion capital-raising initiative detailed in the June 11, 2024, Red Herring Prospectus, set to launch in July. This initiative aims to bolster the CAR, support strategic growth, and meet the new N500 billion capital requirements mandated by the Central Bank of Nigeria (CBN).

GTCO is required to raise additional equity capital of N361.813 billion to meet the new capital requirement of N500 billion set by the Central Bank of Nigeria (CBN) for banks.

These impressive figures raise the question: Is the stock properly priced to reflect the fundamentals?

Valuation Analysis

As stated earlier, GTCO is set to embark on a rights issue to raise capital and meet the recapitalization targets set by the central bank.

While the details are not yet out (as of the time of writing this article), a key point of interest will be the share price at which the rights issue will be offered.

The stock closed the week at N47.35 per share and is one of the most expensive banking stocks in the country. So, is this price fair?

One of the most popular valuation metrics is the price-to-earnings ratio (P/E), which measures the share price of a stock as a multiple of its earnings. The closer this figure is to one or below one, the cheaper the stock.

Using GTCO’s current share price of N47.35 and its trailing twelve months earnings per share (EPS) of N33.27, the stock has a P/E ratio of 1.4x. This compares to the banking sector average of 2.91x.

• This lower P/E ratio suggests that the stock is undervalued compared to its peers, indicating that investors are paying less for each unit of earnings relative to other banks.
• This could be seen as an opportunity for investors if they believe that GTCO’s earnings will continue to grow.

Another valuation metric is the price-to-earnings growth (PEG) ratio, which adjusts the P/E ratio by the stock’s earnings growth. Similarly, a PEG below 1x suggests that the stock is undervalued relative to its earnings growth potential and may offer attractive growth at a reasonable price, appealing to growth-oriented investors.

• Boosted by its recent performance, GTCO has a PEG ratio of less than one, making it attractive for growth-hungry investors.

Additionally, the group’s strong capital assets appear to be reflected in its higher price-to-book ratio of 0.70, compared to the banking sector average of 0.63.

• This suggests that investors value each unit of GTCO’s book value more highly than that of its peers, possibly due to perceived higher asset quality or expectations of better future profitability.
• The expectation of better future profitability also aligns with its higher price-to-sales ratio of 0.82 compared to the sector average of 0.52x.

GTCO’s valuation metrics, including a low P/E ratio, a reasonable P/B ratio, and a relatively higher P/S ratio, combined with a very low PEG ratio, suggest that it might be an attractive investment, especially for those looking for growth opportunities at a reasonable price.

Besides valuation dynamics, GTCO is known for its dividend payouts. In 2023, it paid a dividend per share of N3.2, marking a 3.23% increase from the previous year. The stock currently has a dividend yield of 6% based on its current share price, and this could likely increase as we expect the bank to raise its dividend payout ratio.

Continuing this trend, the bank is expected to declare an interim dividend for the recently ended half-year, enhancing its appeal as an investment, especially for income-oriented investors.

Overall, investors should consider other factors such as market conditions, the bank’s strategic initiatives, and broader economic factors before making an investment decision.