September 11, 2012

SSA ex|Equity|Banks

HOLD [Prev. HOLD]

GUARANTY NL
GTBank the company, liked; GTBank the stock, unliked; FY13 PT Ngn21.9, HOLD

Recommendations
Price ACCESS NL* DIAMOND NL FIRSTBAN NL GUARANTY NL UBA NL ZENITH NL 8.5 2.9 14.3 18.0 4.4 16.3 FY13 PT Potential 8.7 4.9 19.2 21.9 6.4 20.3 2.3% 65.9% 34.3% 21.9% 44.5% 24.3% Action BUY BUY BUY HOLD BUY BUY

* PT is for FY12 as w e are yet to revise assumptions

Share prices performances, YTD

Access 77.1%

Ahead of our expectations despite weaker than anticipated deposit growth: GTBank (GT or the Bank) shows 1H12 earnings that are ahead of our expectations. The deposit growth is behind LS forecast but the higher loan/deposit ratio (LDR) (75% vs. LS est. 70%) results in an in-line loan growth. Interest income is ahead at Ngn83.2bn vs. LS est. Ngn77.8bn while interest expense is in line at Ngn18.8bn vs. Ngn18.7bn. Fee and commission income is ahead at Ngn24.8bn vs. Ngn23.1bn. The loan impairment charge is behind at Ngn2.4bn vs. LS est. of Ngn3.1bn. Management reiterates the <5% target NPL ratio despite growing retail exposure: GT is growing its retail exposure more aggressively than previously. Retail loans went up by 160.8% to Ngn40.9bn from Ngn15.7bn in FY11. The NPL ratio worsened slightly to 3.19% from 3.14% in FY11. Management reiterates the <5% NPL ratio target. Total delinquency ratio improved but the individual delinquency ratio deteriorates: We note that the individual delinquency ratio has jumped to 0.39% in 1H12 from FY11s 0.36%. However, the corporate delinquency ratio has significantly improved, leading to the total delinquency ratio falling to 0.23% from 0.61% in FY11. Management could not confirm to us how much of the retail delinquencies are cashflowing but the deterioration indicates the higher risks in the retail space. The asset sensitive balance sheet could put pressure on net interest income should interest rates decrease: The Banks rate sensitive assets in <1year time buckets reprice faster than rate sensitive liabilities, which is unconstructive to the net interest income should rates decline. Our Gap analysis shows a material loss should rates decrease. However, management is confident that there is sufficient room to support spreads/margins as deposits cost can be reduced by ~100bps and faster than the lending rates. Writing more fixed rate loans than variable also reduced this risk. Overall, we remain concerned by the premium valuation: We believe the stock has historically traded at a premium due to 1) superior accounting and disclosure; 2) superior ROE and 3) consistency in delivery/execution. While we take a conservative view on future NPLs in the system we also believe that the regulatory and accounting frameworks have improved. The premium between GT stock and peers should shrink as system credit issues play out. We favour a switch to ZENITHBAN and FIRSTBAN.

UBA

74.0%

First

60.7%

Diamond

53.1%

GTBank

33.3%

Zenith 0.0% 20.0%

33.3% 40.0% 60.0% 80.0% 100.0%

Impact to NII, rates down 1.5%

<3 months Loans and advances Trading a sse ts AFS assets HTM Assets Other assets* Total interest sensitive assets Deposits from customers Debt issued Other borrowed funds Other liabilities Total interest sensitive liabilities Interest sensitiv e gap Period of gap Rate change Impact to NII Cumulative impact to NII 754.526 73.490 5.013 13.717 336.588 1 185.790 1 049.157 0.000 4.366 35.906 1 102.277 83.513 0.875 -1.5% -1.096 -1.096 3m - 6m 3.242 32.644 0.000 19.912 1.957 57.755 8.019 0.000 0.849 20.813 29.680 28.074 0.625 -1.5% -0.263 -1.359 6m - 12m 13.047 37.105 0.000 51.527 36.887 138.566 1.716 0.000 2.532 3.410 8.078 130.487 0.25 -1.5% -0.489 -1.849 1-5yr 2.858 1.783 0.000 75.895 4.460 84.996 0.000 90.671 10.923 8.587 110.182 - 25.186 -2 -1.5% -0.756 -2.604 >5yrs 21.027 0.294 3.059 3.101 18.063 45.543 0.000 0.000 76.448 0.508 76.956 - 31.412 -4 -1.5% -1.885 -4.489

Valuation metrics
Current Price Access Diamond First GTBank UBA Zenith Average GTBank Premium to Av. GT Bank premium to Zenith GTBank premium to First 8.50 2.90 14.30 18.00 4.40 16.30 PPOP EPS PPOP EPS FY11 FY12 1.55 1.93 3.38 2.88 1.20 2.71 3.21 3.81 4.12 3.59 1.68 3.71 P/PPOP FY11A 5.5 1.5 4.2 6.3 3.7 6.0 4.5 38.1% 3.8% 47.9% P/PPOP FY12F 2.6 0.8 3.5 5.0 2.6 4.4 3.2 59.0% 14.0% 44.5% P/BVPS FY11 0.9 0.4 1.3 2.2 0.7 1.3 1.1 95.9% 66.3% 75.2% P/BVPS FY12 0.8 0.3 1.0 2.1 0.8 1.3 1.1 95.2% 57.0% 97.2%

Whats changed?
Target price DIAMOND NL GUARANTY NL UBA NL ZENITHBAN NL Horizon of TPs DIAMOND NL GUARANTY NL UBA NL FY12 FY12 FY12 FY13 FY13 FY13 From 3.7 17.4 6.0 18.2 To 4.9 21.9 6.4 20.3

Peter Mushangwe

+27 11 551 3675 peterm@legae.co.za

Contents page
1. Retail exposure vs. NPL formation: Still manageable despite the strong retail loan growth 3 2. An Asset sensitive balance sheet vs. NIM: Negative impact could be material should interest rates fall 5 3. Valuation: Reiterating our HOLD on GUARANTY, switch to FIRSTBAN and ZENITHBAN; Rolling forward PTs to FY13 7

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1.

Retail exposure vs. NPL formation: Still manageable despite strong retail loan growth

The bank is increasing its retail exposure, stoking worries but we believe it is still manageable: GT has grown its retail loan book by 160% between FY11 and 1H12 to Ngn40.9bn. As a ratio to total loans, individual loans increased to 8.1% from 4.1% in FY11. During the teleconference, management indicated that the aggressive acquisition of market share in the retail space will continue as it is unconcerned by the NPL formation in the retail space at this stage. We see this change in asset mix as a necessary evil in order to support NIMs, as long as the NPL formation remains under control. Most investors trust GTs management and we hope that management will not impair that trust. The individual delinquency ratio has deteriorated but corporate delinquency has improved and the FV of collateral/delinquencies ratio is above the rule of thumb of 1.2x: While the loans to individuals at only 8.1% of the total net loans is manageable, we note a worsening of the individual loans delinquency ratio, with the ratio increasing to 0.39% from 0.36% in FY11. We have employed the net loans (i.e. excluding impaired loans as that would compress the delinquency ratio) but as a ratio to gross loans the deterioration is worse. In Naira-terms, the delinquencies have increased ~3x to Ngn158mn from a mere Ngn55mn in FY11. The 30-60 day delinquency ratio increased to 0.32% from 0.29% for FY11. However the corporates delinquency ratio improved to 0.22% in 1H12 from 0.62% in FY11. In addition to the improving corporate delinquency ratio, we take comfort in the Future value of collateral/retail delinquencies ratio which is above the rule of thumb of 1.2x at 1.35x. However, this ratio has weakened from 2.7x in FY11. (see Fig 1). Management still expect the NPL ratio to remain below 5%: The NPL ratio improved to 3.19% from 3.58% in 1H11 but this was a slight weakening from 3.14% reported in FY11. While some management teams believe NPL formation will pick up on impact of higher interest rates in 1H12, GTs management does not hold that view. We concur as the banks loan book growth was muted in 1H12, but more importantly we do not believe that the higher interest rate environment should hurt NPLs in a significant manner. Lending rates did not rise materially despite the interbank rates increasing by ~400bps. (see Fig 2). Therefore, we expect the effect to be more negative on the cost of deposits and the consequent interest expense, particularly for banks with inferior deposit franchises and heavy dependence on the interbank market than on NPLs. Having said that, we expect some management teams to blame higher rates for stronger NPL formation. Assuming that some of the delinquencies are cashflowing, (we note that individual delinquencies in the 60-90 day period are nil, which indicates cashflowing of the delinquencies although management could not confirm) then the NPL formation should be muted in the short-term.

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Fig 1: GTs delinquency ratio has improved despite deterioration in the individual day delinquency ratio.

0 - 30 days 31 - 60 days 60 - 90 days FV of colllateral* FV Collateral/Impaired loans As a ratio to Gross loans 0 - 30 days 31 - 60 days 60 - 90 days Deliquency ratio

1H12 Individuals Corporates 0.03 0.44 0.13 0.54 0.00 0.01 0.16 1.00 0.21 4.47 1.35 0.07% 0.32% 0.00% 0.39% 4.48 0.10% 0.12% 0.00% 0.22%

Total 0.47 0.67 0.01 1.16 4.68 4.05 0.09% 0.13% 0.00% 0.23%

FY11 Individuals Corporates 0.00 1.73 0.05 0.50 0.01 0.03 0.06 2.27 0.15 6.38 2.72 0.03% 0.29% 0.04% 0.36% 2.81 0.47% 0.14% 0.01% 0.62%

Total 1.74 0.55 0.04 2.33 6.53 2.81 0.45% 0.14% 0.01% 0.61%

Source: Company reports, Legae Calculations

Fig 2: While the OBB rate has increased significantly, the lending rates have responded mildly. However, there is strong expectation that interest rates will reduce in 1H12 and beyond, squeezing margins
Open Buy Back rate 2012 Average 2011 Average 31 26% 26 24% 22% 21 20% 16 18% 16% 14% 6 23.6% 22.0% 21.9% 22.1% Prime Lending Rate Maximum Lending Rate

23.5%

11

2/25/2011 3/15/2011 3/31/2011 4/15/2011 5/6/2011 5/23/2011 6/8/2011 6/24/2011 7/13/2011 7/28/2011 8/12/2011 9/1/2011 9/21/2011 10/10/2011 10/27/2011 11/16/2011 12/6/2011 12/28/2011 1/27/2012 2/14/2012 2/29/2012 3/15/2012 3/30/2012 4/18/2012 5/4/2012 5/21/2012 6/6/2012 6/21/2012 7/6/2012 7/25/2012 8/14/2012 9/6/2012

12%

Source: CBN, Legae Calculations

Jan-10

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Jan-12

Mar-12

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Jul-12

2.

An Asset sensitive balance sheet vs. NIM: Impact could be material should rates fall

The balance sheet is asset sensitive yet interest rates are expected to reduce; Management is confident that room to reduce cost of deposits and sustain spreads is sufficient: The banks balance sheet is asset sensitive in all time buckets expect for >1yr. (see Fig 3). This is constructive should interest rates go up as loans will be re-pricing faster at new higher rates. However, interest rates are generally expected to decline, which in our opinion could put pressure on interest spreads. The short-tenor of the fixed income portfolio (management indicated that the portfolio is predominantly composed of Treasury Bills of tenors up-to 180 days) that provided strong yields in 1H12 would exacerbate the problem. However, management believes that there is sufficient room to manage the cost of deposits downwards as well as to change asset mix in order to support NIMs. It believes that is can reduce the cost of deposits by 100bps. The teleconference also validated our view of a conservative balance sheet management as management refuted the idea of taking positions in long-term instruments (in order to lock in higher yields in case interest rates decline). In managements view, that would be speculative as it cannot ascertain the direction of interest rates with certainty. To an extent we agree but we also believe the Banks Treasury department would take a view on interest rate direction otherwise we fail to understand how ALM is employed without a view on rates direction. But assuming a parallel interest rate shift of 150bps, our Gap analysis shows that the bank could suffer a material loss: We carry out a static gap analysis on the interest rates sensitive assets and interest rate sensitive liabilities. We assume a downward parallel rate shift of 150bps. Given the banks asset sensitive structure, a 150bps reduction in interest rates would lead to a Ngn4.5bn dent on net interest income. This is 7.3% of net interest income reports in 1H12. However, we underscore that 1) Our Gap analysis is static. Banks balance sheets are fluid and most likely this reported gap position has already changed, while our analysis assumes it remains in place for the remainder of the year. Additionally, the bank could reduce the risk by writing more fixed interest rate loans than variable rate loans as management seems averse to increasing the duration; 2) our parallel shift in interest rates is simplistic as short-term interest rates tend to be more volatile than longer term. Assuming long-term rates decrease by only 50bps, the loss reduces to Ngn2.7bn; and 3) the bank can reduce deposit rates quicker than lending rates. Lending rates tend to be sticky in a declining interest rate environment while banks quickly price down deposit rates. All of the above would reduce the possible impact to net interest income we estimate in this report. Nonetheless, our analysis indicates the high level of interest rate risk the bank faces should rates decline. Needless to say, the balance sheet would benefit immensely should rates take an upward trend. (see Fig 3).

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Fig 3: Our gap analysis on interest sensitive assets and liabilities shows that the bank will suffer a cumulative loss of 4.5bn should rates decline by 150bps. Fortunately banks balance sheets are dynamic
<3 months Loans and advances Trading assets AFS assets HTM Assets Other assets* Total interest sensitive assets Deposits from customers Debt issued Other borrowed funds Other liabilities Total interest sensitive liabilities Interest sensitiv e gap Period of gap Rate change Impact to NII Cumulative impact to NII 754.526 73.490 5.013 13.717 336.588 1 185.790 1 049.157 0.000 4.366 35.906 1 102.277 83.513 0.875 -1.5% -1.096 -1.096 3m - 6m 3.242 32.644 0.000 19.912 1.957 57.755 8.019 0.000 0.849 20.813 29.680 28.074 0.625 -1.5% -0.263 -1.359 6m - 12m 13.047 37.105 0.000 51.527 36.887 138.566 1.716 0.000 2.532 3.410 8.078 130.487 0.25 -1.5% -0.489 -1.849 1-5yr 2.858 1.783 0.000 75.895 4.460 84.996 0.000 90.671 10.923 8.587 110.182 - 25.186 -2 -1.5% -0.756 -2.604 >5yrs 21.027 0.294 3.059 3.101 18.063 45.543 0.000 0.000 76.448 0.508 76.956 - 31.412 -4 -1.5% -1.885 -4.489

Source: Company reports, Legae Calculations

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3.

Valuation: FY13 PT is Ngn21.9, HOLD

We continue to favour the switch to ZENITHBAN and FIRSTBAN on relative attractiveness: Among the stocks making our core holding, we have recently recommended that investors to switch from GUARANTY to ZENITHBAN and FIRSTBAN. We maintain that recommendation. This switch recommendation is purely valuation based. We believe GT is a valuable franchise, and has come out of the calamitous period in better shape than most Nigerian banks, but we are unsure if the current premium is sustainable as system earning clarity improves. As the systems credit issues play out, we prefer to compare valuations on a preprovisions operating profit (PPOP). (see Fig 4). On a P/PPOP, GUARANTY is trading at excessive premium to peers. Should the system credit costs peter out as we expect, this premium should also shrink, in our opinion. On a Price/Book ratio basis, the stock is also trading at a premium. In our view, GUARANTY should trade at a premium but the current premium is disproportionate, in our opinion, limiting further meaningful multiples expansions, hence we favour stocks that could benefit more from PER and PBVR expansion than EPS and BVPS growth. (see Fig 4). as our Justified PBVR for GUARANTY, at 2.4x looks generous enough for the superior ROE. We roll forward the PT to FY13: We apply the Justified PBVR method to all banks in our universe. Employing a CoE of 19.25%, average nominal growth rate of 13.5% and an average ROE of 27.6% for GT over our forecasting period, we calculate a Justified PBVR of 2.4x. This provides us with a FY13 PT of Ngn21.9, being a product of our Justified PBVR and our FY13 book value per share estimate. Our PT is 21.9% above the current price, but we maintain our HOLD recommendation on our thesis of a switch to ZENITHBAN and FIRSTBAN. We roll forward our PTs to FY13 for DIAMOND and UBA: We are also rolling forward our PTs for DIAMOND and UBA to FY13 and maintain our BUY recommendations on the stocks. (see Fig 5). However, we caution that the strong performance of these stocks on a YTD basis could create headwinds to further stock appreciation as some investors may take profit. UBA and DIAMOND have appreciated 74% and 53% on a YTD basis respectively. We shall roll forward our PT for ACCESS post 1H12 results release.

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Fig 4: We are negative on GUARANTY primarily on valuation. As earning clarity and NPL formation improves system-wide, GUARANTYs premium to peers should reduce.
Current Price Access Diamond First GTBank UBA Zenith Average GTBank Premium to Av. GT Bank premium to Zenith GTBank premium to First 8.50 2.90 14.30 18.00 4.40 16.30 PPOP EPS PPOP EPS FY11 FY12 1.55 1.93 3.38 2.88 1.20 2.71 3.21 3.81 4.12 3.59 1.68 3.71 P/PPOP FY11A 5.5 1.5 4.2 6.3 3.7 6.0 4.5 38.1% 3.8% 47.9% P/PPOP FY12F 2.6 0.8 3.5 5.0 2.6 4.4 3.2 59.0% 14.0% 44.5% P/BVPS FY11 0.9 0.4 1.3 2.2 0.7 1.3 1.1 95.9% 66.3% 75.2% P/BVPS FY12 0.8 0.3 1.0 2.1 0.8 1.3 1.1 95.2% 57.0% 97.2%

Source: Company reports, Legae Calculations

Fig 5: We are rolling forward our PTs for DIAMOND and UBA as well.

Target price DIAMOND NL GUARANTY NL UBA NL ZENITHBAN NL Horizon of TPs DIAMOND NL GUARANTY NL UBA NL

From 3.7 17.4 6.0 18.2 FY12 FY12 FY12

To 4.9 21.9 6.4 20.3 FY13 FY13 FY13

Source: Legae Securities

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Legae Securities (Pty) Ltd

Member of the JSE Securities Exchange 6A Sandown Valley Crescent, Sandown, Johannesburg, 2196, South Africa P.O Box 650361, Benmore, 2010, South Africa Tel +27 11 722 7330, Fax +27 11 722 7330 Web: www.legae.co.za email: research@legae.co.za

Analyst Certification and Disclaimer I/we the author (s) hereby certify that the views as expressed in this document are an accurate of my/our personal views on the stock or sector as covered and reported on by myself/each of us herein. I/we furthermore certify that no part of my/our compensation was, is or will be related, directly or indirectly, to the specific recommendations or views as expressed in this document This report has been issued by Legae Securities (Pty) Limited. It may not be reproduced or further distributed or published, in whole or in part, for any purposes. Legae Securities (Pty) Ltd has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Legae Securities (Pty) Limited makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion herein are those of the author only and are subject to change without notice. This document is not and should not be construed as an offer or the solicitation of an offer to purchase or subscribe or sell any investment. Important Disclosure This disclosure outlines current conflicts that may unknowingly affect the objectivity of the analyst(s) with respect to the stock under analysis in this report. The analyst(s) do not own any shares in the company under analysis.