As the H1 2023 earning season approaches, investors are eagerly awaiting the financial results of companies, including Guaranty Trust Holding Company PLC (GTCO). The company’s performance in Q1 2023 has raised expectations and sparked optimism for its future prospects.
GTCO’s stock has been consistently rated as a “BUY” by analysts, indicating their belief in its potential for value appreciation. The stock has shown impressive year-to-date performance, starting at NGN 23.00 and gaining 51.3% in value. This places GTCO at the 61st position on the Nigerian Stock Exchange (NGX) in terms of year-to-date performance. Furthermore, over the past four weeks, GTCO’s stock has accrued a 9% increase, ranking it as the 60th-best performer on the NGX during that period.
However, investors should exercise caution and consider that target prices and ratings are based on analysts’ opinions and forecasts, which can be subject to changes over time. The actual performance of a stock can be influenced by various factors, including the company’s financial results, industry trends, market conditions, news events, changes in company policies, and other unforeseen developments.
Analysts estimate that Nigerian banks’ Q2 2023 earnings results will be positively influenced by the floating exchange rate system. This change will allow banks to value their foreign exchange (FX) balances according to the market rate, which is expected to have a favorable impact on their earnings.
For GTCO specifically, analysts project an increase in earnings per share (EPS) to N7.20 for the 2023 fiscal year. This projection indicates anticipated growth compared to the current EPS of N6.51 (TTM) and the reported EPS of N5.95 for the 2022 fiscal year.
However, when looking at past figures, there is a potential concern regarding GTCO’s ability to meet these ratings and estimates. In the 2022 financial year, GTCO experienced a decline in net income on a year-on-year basis. Net income fell by -3.12%, decreasing from N172.11 billion to N166.74 billion.
Similarly, EPS excluding extraordinary items dropped by -3.09% year-on-year and averaged a decline of -1.87% per year over the past five years. These figures indicate a decline in the company’s profitability compared to the previous year and over an extended period.
Furthermore, GTCO’s five-year annualized earnings per share growth rate ranks below the industry average relative to its peers. This suggests that the company’s earnings growth over the past five years has been slower compared to other companies within the same industry.
Despite these concerns, GTCO’s Q1 2023 financial results provide a more positive outlook. The company achieved a profit before-tax growth of 36.48%, reaching N74.09 billion. This significant increase in earnings before accounting for tax expenses is an encouraging sign for the company’s performance.
In addition, GTCO recorded its highest earnings per share (EPS) in five quarters, reaching N2.04. EPS represents the portion of a company’s profit that is attributable to each outstanding share of its stock. This milestone highlights the improved profitability of GTCO during Q1 2023.
GTCO’s Q1 2023 financials reveal impressive growth in the other income category, primarily driven by improvements in forex-related transactions. The company experienced a significant decline of 94.2% in foreign exchange revaluation losses, with the loss reducing to -N186 million compared to -N3.328 billion in the previous year’s Q1.
Looking ahead, it is anticipated that the foreign exchange revaluation losses will continue to decrease and may even cease altogether during the remaining periods of 2023 due to the Naira devaluation.
Furthermore, GTCO Plc is expected to sustain the growth in its asset lines due to the significant increase in the exchange rate, which has risen by as much as 95% so far this year. This increase in the exchange rate can have a favorable impact on the valuation of the bank’s assets, contributing to the growth of its asset lines.
In 2022, GTCO witnessed growth across all asset lines. Apart from increased inflows from Deposit Liabilities, which were fueled by an enhanced funding base and the synergies created through the Holding Company structure, the 6.1% year-on-year exchange rate movement in Nigeria also played a positive role. This movement refers to the change in the exchange rate from ₦435/$1 at the fiscal year 2021 closing to ₦461.5/$1 at the fiscal year 2022 closing. The appreciation in the exchange rate bolstered the value of GTCO’s assets, contributing to a Pre-tax Return on Average Assets of 3.6% and a Pre-tax Return on Average Equity of 23.6%.
In 2022, Guaranty Trust Holding Company PLC maintained a well-distributed loan book with an improved LCY: FCY mix of 53%:47% compared to 51%:49% in the previous period. This strategic positioning provided some protection against further depreciation of the Naira. However, considering the devaluation of the Naira, the bank’s loans are likely to experience increased debt obligations.
As a consequence of the Naira devaluation, the bank may face challenges with loan repayment and credit risk. We anticipate higher loan loss provisions in response to these potential challenges, possibly exceeding the NPL (Non-Performing Loan) ratio of 4.9% projected for 2023. In 2022, it recorded an NPL ratio of 5.20%, which was below its 2022 guidance of 6%.
The potential increase in loan loss provisions is expected to be driven by the higher risk associated with the devaluation of the Naira and its impact on borrowers’ ability to meet their debt obligations.
While the bank’s loan book remains well distributed, the adverse effects of the Naira devaluation warrant careful monitoring and prudent risk management. By maintaining a proactive stance and adhering to rigorous credit assessment processes, GTCO can work towards mitigating the potential impacts of the devaluation on its loan portfolio and overall financial health.
Naira devaluation may also lead to higher risk-weighted assets if the bank holds foreign currency-denominated loans or investments. As the value of these assets increases in Naira terms, it may result in higher risk-weighted assets, which could potentially lower the capital adequacy ratio.
Considering the bank’s capital adequacy ratio of 24.08% recorded in the 2022 financial year and its guidance of 23% for 2023, the impact of Naira devaluation will depend on several factors, including the magnitude of the devaluation, the bank’s foreign currency exposure, and its ability to manage credit risks effectively.
While achieving the 2023 capital adequacy guidance of 23% may present some challenges due to the Naira devaluation, it’s important to note that the bank’s overall financial performance and risk management practices will play a significant role in determining whether it can meet its capital adequacy target. The bank’s prudent risk management and efforts to optimize its capital allocation will be critical in navigating the potential effects of the Naira devaluation on its capital adequacy ratio.