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This ongoing financial year 2021 is ,no doubt, a very tough one for Guaranty Trust Bank . Practically all GTB’s critical half year performance metrics look southward, leaving unimpressive glimpses for the ongoing financial year ..By the latest revelation it recorded the worst Year To Date decline in share price out of all first tier banks . This could be traced to its lethargic performance in the recent time as investors are fighting back
This development has continued to raise a serious question about its robust profit machine . The worry may not be misplaced . Guaranty Trust Holding Company ,GTCO, is a very unique bank with the power of “thinking differently.” ; its leadership has a culture of thinking differently .The bank’s Managing Director and Chief Executive, Segun Agbaje often reiterates this belief at any slightest opportunity : “ we are not in the race for revenue and assets size but in competition for scaled overall business growth and underlying profitability” . Underpinning this strategy is its belief in the unassailable power or efficacy of stretch and leverage as opposed to a mere race for or focus on revenue volume and assets size; It refuses to acquires any bank , it stands alone and maintains organic growth ; it ignores the temptation of aggressively beefing up its assets level while it keeps the least assets among its peers . Without a doubt, thinking differently has taken the bank very far since it was established .: it has remained the second most profitable bank after Zenith Bank despite having the least assets at its disposal .
However, things are no longer as usual . The bank is now under heated competitive pressure and has lost that position to another for now . And unless it recaptures it by the end of this financial year, that may change the profitability leadership equation of the Nigerian banking industry led by Zenith Bank Plc .
HALF YEAR 2021 RESULTS
With the release of the half year result for 2021, the red ink blotting the progress of Guaranty Trust Holding Company ,GTCO, in the first quarter was expected to be dabbed off and the bank returned to stay within the black lines of high profitability it belonged in the full year 2020 . It was with this level of expectations that investors and indeed the financial world waited to see GTCO’s half year result for 2021
.The bank ,however , disappointed them in first half which ended June 30, 2021. Q2,2021 was GTB’s season of chain declines The bank is currently combating a serious downturn; it has been deviating from its known track and it is now on fast lane losing that image in the last few quarters .Gross Earnings declined by 8% from ₦225.1bn in H1-2020 to ₦207.9bn in H1-2021 primarily from 18.0% reduction in Interest Income from ₦153.7bn to ₦126.1bn and Other Income (₦33.1bn vs ₦34.2bn), which offsets growth recorded on the Fees and Commissions line (₦38.3bn vs ₦26.5bn) during the period. •. Relative to interest income, Interest expense declined at a rate of 27 percent to N19 .0 billion from N 26.1 billion . Net Assets declined by 2.1% from N814bn to N797.58bn . Its Group reported . profit before tax of ₦93.1billion, representing a dip of 15.2% compared to ₦109.7billion recorded in the corresponding period of June 2020 ; profit after tax was 15.8 percent was down to N79.4 HY 2021 from N94.3 HY 2020 .
It started in the first quarter of this financial year .. GT Bank’s PBT in Q1 ’21 results fell -8% y/y to NGN53.7bn. .The key drivers were a -4% y/y decline in pre–provision profits and a 52% y/y increase in loan loss provisions. The decline in pre–provision profits was mainly underpinned by an -18% y/y reduction in funding income to NGN52.4bn due to lower asset yields .
This uninspiring run leaves investors nervous while craning to take another look at the bank’s performance. Its performance did not show the bank will be a harbinger of a juicier outing in the 2021 financial year .Contrary to the expectations , practically all its critical performance metrics looked southward, leaving unimpressive glimpses for the ongoing financial year . .
INVESTORS’s ORDEAL AS THE DOWNTURN HITS GTB’s STOCK PRICE
Sequel to the weak performance in the last few months ,there is no doubt that the investors are not happy and are fighting back ; and the bank is paying for it in a hard way . In the thirty-two weeks since the beginning of 2021, . GT Bank, whose share price fell from N33 in January to N28 in August, ranked it the worst among the tier one banks with a -13. 93% decline in its share price.
The overall banking sector of the NGX recorded a -6% decline in its index, thus making GT Bank and UBA among tier one banks that under performed the Sub sector index . Overall, the negative stock price performance indicates that investors are concerned about the bank’s business . The negative trend so far recorded in the price movement of the shares of GT Bank shows that the Management needs to address underlying issues . Unlike GTB and UBA , Access Bank, FBNH, and Zenith Bank were the only tier 0ne banks that outperformed the industry .
GT bank stock capital depreciated heavily just as its value shaved . GTBank was N977 billion market capitalization at close of .November ,2020 but this Monday it was N811 billion .. GTHO 52 weeks price ranged between N26.95 and N38.45 per share in a floundering capital market indicating its market value swung between N792 billion and N1.1 trillion .
GTHO has stayed flat for the better part of last week to this Monday , September 27 , trading at N27.60 per share in a floundering capital market. The dip in the bank’s stock price betrayed its lethargic performance metrics . The current share price of Guaranty Trust Holding (GTCO) is N27.60. GTCO closed its last trading day of Monday, September 27, 2021 at N27.60 per share on the Nigerian Stock Exchange recording a 0.5% drop from its previous closing price of N27.75 . Guaranty Trust Holding began the year with a share price of 32.35 NGN but has since lost 14.7% off that price valuation, ranking it 139th on the NGX in terms of year-to-date performance.
The above misfortunes could be traced to the bank’s dwindling profitability in the last six months and this is evident in its crashing profit margins , return on share holders equity and assets .All these indicate something urgently that needs to be addressed is wrong with the bank’s profit engine . .With the above results for the first half of 2021 the bank’s pre- tax profit margins backtracked from 48.7 percent to 44.8 percent while its net profit margin nosedived to 38 percent from 42 percent .Also , its Return on Assets (post tax) fell from 4.56% to 3.19% while its return on equity down from 26.78% to 19.71% . The above two critical metrics signal declining profitability .
GTHO ’s current trading price which represents a P/E of 4.2x is a poor value compared to the Nigerian Banks industry average 4x However, : GUARANTY PE Ratio 4.2x is a good value compared to the market 7.7x indicates its share price is currently undervalued and could gain better strength if investors confidence is enhanced by better performance .At its PB Ratio of 0.8x in its 2021 FY earnings compared to the Nigerian Banks industry average of 0.4x is outperforming the sector but this is an indication that its share is still selling bellow the premium ; this manifests clearly on its falling market value and this is expected to improve when investors sight signals of better performance on the horizon ,
BETWEEN THE WANING PERFORMANCE METRICS AND HIND THE MARKET UNIMPRESSIVE OUTLOOK
.No doubt , the effectiveness of GTB’s profit engine which is determined by its deep seated beliefs about how money is made in this business and what assets and skills are critical for this , is gradually becoming obsolete . And the impacts are palpable on its half year 2021 results. The decay started in the last few years and is gradually eaten deeply into its core strength . GTHO is ,no doubt, is under heated competitive pressure . From every indication , GTHO’s competitors are seriously harnessing the potentials of their bigger asset size and sharpening their competitive edge to outperform it .
The bank has begun to loose its bearing on the above critical competencies driving its profitability engine in the industry . Some major negative highlights of its performance are the waning figures of the critical performance metrics particularly cost to income , net interest margins , non performing loan ,and profit margins which used to be its unique selling points and drivers of its leadership . .
In 2016, its non performing loan was just 3 percent , but deteriorated to 7.66 percent , 7.30 percent .,6.53 percent and 6.39 percent between 2017 and 2020 . Its cost to income increased to 38.24 percent in 2020 from 36.11 percent in 2019 while its net interest margin fell marginally to 9.26 percent in 2020 from 9.28 percent in 2019 . However , GT Bank’s net interest margin (NIM) contracted to .6.96% in Q1,2021 ,- the lowest in recent times – from .9.89% in Q1 ’20 . In the first half 2021 , it crashed to 6.98 percent from 9.74 percent half year 2020
Between June 30, 2020 June 30, 2021, Cost to income ratio worsened from 43.16% to 48.98% .However while the Non performing loan to total assets improved from 6.39% to 5.99% ,it is still above the regulatory minimum of 5 percent
While it cannot be disputed that GTB performance in those metrics are still superb except for its non performing loan ratio, it is also tenable to say the bank is gradually losing its grips on them and the impacts in the absolute figures are overwhelming .
The fact is that every company must be alert to anything that could undermine the efficiency of its engine as a profit generator .A company must constantly inquire of itself whether its definition of its served market is too narrow, whether its margin structure can be sustained, and whether there might be another ,much more efficient way to deliver a particular product or service . Over time ,new ,more efficient profit engines make older one obsolete. This is the problem that must be addressed urgently to reclaim its leadership
GTB’s PROFIT ENGINE AND DWINDLING NET INTEREST MARGIN
A banker is best rated by his or her ability to lend safely and profitably. The negative impacts of its obsolete profit engine led to a drawback on its core business and the consequent deterioration of its interest and net interest incomes . NII is sensitive to both credit risk and market risk and only those players with iron teeth could break the two hard nuts . Market risk is essentially interest-rate risk for loans and deposits. Interest-rate risk will be driven by the maturity structure of the loan book, as well as the match (or mismatch) between the maturity of the loans against the maturity of the funding , known as the interest-rate gap.. Th e above is where the boys are separated from the men in banking , the core business that delivers the biggest chunk of the revenue . Most banks are attributing their current misfortunes in the last few years to the prevailing low yield environment, This is very much tenable . In a declining or low interest-rate environment, banks may suffer from negative NII irrespective of their asset–liability maturity profile, as it becomes more and more difficult to pass on interest rate cuts to depositors .
This is where GTB is having its headache currently and the bank is blaming its ordeal on low yield .According to the bank reduction in funded income on a dip in average yield on earnings assets in H1-2021 to 8.1% from 11.9% in H1-2020 . This is in spite of the growth in the earning assets average volumes which increased to ₦2.35tn in H1-2021 from ₦2.14tn in H1- 2020. Ordinarily, an increase in earning assets should lead to increase in revenue but not when the profit engine is obsolete ,
Furthermore , portfolio yield on Investment Securities (FIS) dropped to 4.1% inH1-2021from 14.2% inH1-2020. and further compounded by decline in yield on Local Currency ,LCY, loans from 13.4% in H1 2020 to 11.4% in H1 2021. The yield drop ,according to to the bank ,could be linked to a drop in interest rate on Intervention Loans from 9% to 5% as directed by the apex bank and the repricing of investment grade loans done to ward off competition and retain large corporate that has capacity to tap money market and issue their own CPs in view of the low interest rate environment. •
In response to the declining yields on loans and FIS, the management said the Group reduced its Cost of Funds to 0.7% in H1- 2021 from 1.5% in H1-2020 as interest expense decreased by 46% (₦9.5bn) to ₦10.9bn in H1-21 from ₦20.3bn inH1-20. However, this was not enough to rescue it from a landslide decline of net income
Consequently, Net interest Margin (NIM) dropped to 6.98% in H1-2021 from 9.74% in H1-2020 despite the fact that the Group increased its volume of transactions by leveraging on its retail base. The volume expansion resulted in higher earnings from Fees and Commission which grew 45% from ₦26.5bn inH1-2020to ₦38.3bn inH1-2021 just as the dealing room efficiency resulted in Net Trading Gains of ₦10.4bn (vs ₦10.8bn in H1-2020), however a reduction in trading volume led to a decrease in earnings ..
However, the few that know and understand the terrain are still in control . . Though low yield could be blamed for the above misfortunes asset maturity profile relative to funding liability of individual banks is also a decisive factor . This may not be misplaced . Banks that have assets that mature earlier than their funding liabilities will gain from an environment of rising interest rates. The opposite applies where the asset book has a maturity profile that is longer dated than the liability book. And only the few that understand this could win the battle
HOW TRADING BUSINESS PLAYS THE SPOILER
Despite the above heavy downturn the bank made frantic efforts to make up for its less inspiring performance in the core banking in the Non-interest income segment . This is not uncommon . A good manager of a financial institution or bank usually rev up non interest income items of its balance sheet because it holds the key to stabilizing earnings especially at the time of recession or interest rate volatility . Fee income is very popular with bank senior management because it is less volatile and not susceptible to market risk like trading income or NII. There is also no credit risk because the fees are often paid up front. There are other benefits as well, such as the opportunity to build up a diversified customer base for this additional range of services . The bank exploited this advantage . A total sum of N81.8bn or up 14.5%. comprising of fee and commission income, net trading gains, and other income was gathered compared to N71.4bn in June 2020: The non-interest income growth resulted largely from 44.7% increase in fee and commission income primarily driven by improved digital earnings
. However , trading activities is not as easy as fee and commission income segment . Trading income is the most volatile income source for a bank. It also carries relatively high market risk, as well as not inconsiderable credit risk . Even a record of consistent profit in trading over a long period is no guarantee of future losses arising out of market corrections or simply making the wrong bet on financial markets. The bank appeared to be overwhelmed by these challenges and it suffered some injuries here . Income from this segment witnessed a drop in the period under review . Incomes from non interest segment was partly offset by 3.3% dip in trading gains and 3.1% dip in other income .
The operational management segment of the bank also needs to be reinvented too . . Its depreciating operational efficiency hit hard on its bottom line in the first half of 2021 .After providing for impairments and operating costs, the bank pre-tax profit dropped by 15.2 percent even with fee and commission income inching up by 53 percent as its pre-tax profit dropped to N 93.1 billion from N109.7 billion. After paying N13.6 as tax compared to N15.4 billion in 2020 , net profit shut down to N 79.4 billion from N 94.3billion, a 15.8 percent drop .
OPTIONS BEFORE THE GTB
.GTCO is now under serious competitive pressure . No doubt , its competitors are exploiting some gaps on its profit wall . Two options are before GTHO now to reclaim its leadership from Access and others with similar asset size advantage . If it will continue to retain its position in terms of net profit, the bank should either reinvent its profit engine by regenerating its core strategies or boost its asset position to be competitive . With its whooping assets , Access Bank is gaining upper hand over its peers including GTHO as it deployed almost double of GTHO’s earning assets into the core business of banking and making huge income that is almost double that of GTHO. This may constitute a threat to GTHO leadership unless it has a cutting edge skill to efficiently outperform Access with its relatively smaller asset base . This option seems remote particularly with Access Bank sharpening its skills leading to improvement in its net interest margins and cost to income among others as indicated in the first half of 2021 .This development has demystified GTB’s leadership in those critical metrics and it needs to boost its assets and ensure better performance metrics . .Whether it can do this is a matter of time