Nigeria’s biggest bank.
Those three words may well be a convincing-enough investment thesis for many stock speculators.
With its enormous and young population, wealth of oil and gas reserves, and improving infrastructure, Nigeria epitomizes Africa’s potential. And few companies stand to benefit more as the country fulfills that potential than its banks.
Exposed as they are to a broad swath of the nation’s economic activity, from infrastructure to agriculture, small-and-medium-sized enterprises to corporates, and individuals to conglomerates, banks are a fantastic way to participate in a country’s macroeconomic growth.
Nigeria’s largest bank in terms of market value, Guaranty Trust Bank is one that every Africa investor should take some time to get to know.
Guaranty Trust (commonly known as GTBank) has grown since its formation in 1990. Unlike many of Africa’s homegrown banks, its strategy focused on attracting corporate customers instead of retail clients. The approach meant it needed to grow its asset base quickly in order to compete with multinational banks for big lending deals.
Toward that end, it raised capital via an IPO on the Nigerian Stock Exchange in 1996, just five years after opening its first branch. A rights offering, a secondary listing on the London Stock Exchange (Nigeria’s first), and a Eurobond soon followed.
Now, with Nigeria’s central bank reducing the attractiveness of public sector deposits, GTBank’s management is turning its attention to the ordinary man and woman on the street. A larger base of retail customers would give the bank a nice pool of inexpensive money to lend.
So far, so good, it would seem. The bank grew its deposits 23 percent in 2013. Perhaps more importantly, it put more of those deposits to productive use than it has in previous years. The loan-to-deposit ratio increased from 66.9 percent to 69.9 percent one year earlier.
Alas, record-high interest rates and regulatory changes obscured these encouraging balance-sheet trends. The compressed margin between the interest GTBank was able to charge its borrowers and the rate it was forced to pay its creditors meant that net interest income increased just 5 percent. And new limits on ATM and transaction fees muted growth in non-interest income.
These stiff 2013 headwinds meant that the bank’s earnings growth amounted to just 4% for the year – not exactly the sort of performance that’s going to provoke a stampede of investors to the stock. In fact, GTBank’s London share price has dropped 9 percent since the results were announced.
In my view, the drop gives long-term Africa investors a unique opportunity to pick up shares of the bank at a discounted price.
Here are three reasons why.
Non-performing loans amount to less than 3.6 percent of GTBank’s total lending portfolio – a figure that has dropped steadily in recent years. It also boasted a tier-one capital adequacy ratio of nearly 24 percent, giving it a huge buffer to absorb unexpected loan losses.
What’s more, with a market value of $4.3 billion, Guaranty Trust Bank is the largest bank in Sub-Saharan Africa outside of South Africa. This size makes it, in Nigeria’s eyes, too big to fail. The government stepped in to rescue the sector during the banking crisis of 2008-2009, and there’s little doubt it would do so again if circumstances should call for it.
Not content to be Nigeria’s leading bank, management has made it very clear that it intends to build GTBank into a pan-African player. In February, it completed its purchase of Kenya’s Fina Bank, a relatively small, unlisted institution that nevertheless has operations in fast-growing Rwanda and Uganda. With the transaction complete, GTBank now has a presence in nine African countries.
Pre-tax profits from its non-Nigerian African subsidiaries grew 74 percent in 2012 and accounted for more than 5 percent of the total. We can expect this to increase further still as Fina Bank’s operations are consolidated and grow.
GTBank treats its shareholders well. It has paid a dividend every year since its 1996 listing and has increased it each year since 2009. In 2013, it increased the dividend 9.7 percent.
The bank currently trades at a P/E ratio of 7.5 and price/book of 2.1. Both multiples are near their lowest point in years.
As you’ll note in the disclosure statement below, I am not an impartial observer of this stock, but, in my view, I believe GTBank is worth roughly NGN29.75 per share. If it should reach that price, investors on the Nigerian Stock Exchange would realize a 25-percent capital gain while enjoying a 7.1-percent dividend yield.
The stock offers even more value on the London Stock Exchange. The GDR, which represents 50 Nigerian shares, trades for just $6.85. That’s a 5-percent discount to the price in Lagos.
Disclosure: I have a beneficial interest in shares of Guaranty Trust Bank through my work with Africa Capital Group.
Ryan Hoover is an investment analyst with Africa Capital Group and the founder of InvestingInAfrica.net. Contact him at ryan@investinginafrica.net.
