Event

GTCO’s performance was very much improved in Q2 2022, driven by higher volumes of interest-earning assets and higher asset yields.  Specifically, improved yields on fixed income securities and loan book drove interest income to grow by 16% YoY to N76.56bn in Q2 2022. Despite a corresponding cost of fund increase, net interest income (after impairment) grew by 18% YoY to N61.33bn.

Non-Interest income grew by 21% YoY to N43.14bn in Q2 2022, majorly driven by corporate finance fees (+467% YoY to N3.31bn). According to management, the Group restructured two syndicates during the period, and recorded earnings from the transactions. The other driver of non-interest income was trading gains, which grew by 426% YoY to N8.30bn. However, ‘other income’ declined by 27% YoY to N9.69bn due to lower FX revaluation gains and mark-to-market fair value losses.

Cost-to-income ratio improved by 500 basis points to 51% in Q2 2022 (Q2 2021: 56%), on the back of higher operating income. Operating expense grew by just 4% YoY to N51.37bn, compared to a 13% YoY operating income growth to N100.33bn. Thus, profit before tax grew by 24% YoY to N48.96bn. Bottomline gains were significantly reduced, given a higher effective tax charge in Q2 2022. The Group’s effective tax rate stood at 30% in Q2 2022 versus 14% in Q2 2021. This was because of the new tax laws which removed tax-exempt status of some government securities.

Consequently, profit after tax grew by just 1% YoY to N34.35bn in Q2 2022. As is the Group’s tradition, a N0.30 interim dividend was declared, to be paid on September 30, 2022. The qualification date is on September 20, 2022.

Outlook

Prior to the start of the year, the management guided a strong deposit and loan growth but that did not materialise as of H1 2022, and we believe that the chances are low to meet with the stated targets. According to the management, a cautious approach is being taken towards aggressively growing the loan book due to macroeconomic headwinds, across its geographical markets. Going forward, the strategy of capital deployment will be to cautiously grow the loan book in the Nigerian market and invest more in fixed income securities in the Pan African markets due to their relatively high yields.

In our view, we expect the Group to benefit from the rising interest rate environment. A combination of higher asset volume and improved net interest margin is expected to drive interest income in H2 2022. We maintain our earnings forecast (EPS: N6.07). At the current share price, the estimated earnings yield is 31%, which effectively implies a forward price-to-earnings of 3.25x.

The forward P/E is a 37% discount to our estimated justified P/E of 5.12x. Also, it is a 38% discount to the stock’s historical P/E of 5.25x. We posit that the stock trades at a discount to its fundamentals. While we note the earnings pressures, we believe that the stock is steeply underpriced relative to its earnings potentials. Therefore, we maintain our BUY rating

Please follow the link “GTCO Plc Q2 2022 – Turbocharged for Future Growth”  to view the whole report.

Thank you.