Q1 2019 REVIEW OF
GCB Q1 2019 REVIEW
CONTENTS
INTRODUCTION 01 04 About the UMB 10 Index Focus of Our Review
MAIN HIGLIGHTS 02 05 Business Description, Recommendation and Highlights
MACROECONOMIC ANALYSIS 03 06 Performance of the macroeconomy
BANKING SECTOR ANALYSIS 04 07 Review of Ghana’s Banking Sector
GCB SHARES IN FOCUS: PERFORMANCE VS. OTHER UMB 10 INDEX 05 CONSTITUENTS 08 Comparative Analysis: Income; Return; Growth; Efficiency; Profitability; CAR and NPL
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GCB Q1 2019 REVIEW
06 FINANCIAL ANALYSIS 09 Analysis of the Income Statement and Balance Sheet
RATING METHODOLOGY AND ADDITIONAL MULITIPLES CONSIDERED 07 11 Price/Revenue; Price/Book; Price/Earnings; Price/Projected Earnings; Earnings Growth; Revenue Growth; and Price/Cash Flow
RATING DEFINITIONS AND VALUATION 08 12 Valuation and Valuation sensitivities
ECONOMETRIC MODELING AND STATISTICAL INSIGHTS 09 13 The drivers of GCB’s price
RECOMMENDATIONS 10 15 Recommendations to Improve the Bank’s Liquidity Position
CONTACTS 11 16 Contact Persons
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GCB Q1 2019 REVIEW
BUY HOLD SELL Report Date: 27/05/2019 A+ A A- B+ B B- C+ C C- D+ D D- E E- F BUY TARGET PRICE GHS6.2 Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
INTRODUCTION
THE UMB 10 INDEX
As part of our strategy to help stock market investors make Movement of the UMB 10 Index Year to Date Returns (UMB 10 Index better decisions that will ensure optimal returns on the Vs GSE CI) 1,040 market, we created the UMB 10 Index in January 2018 to 2.00 1,020 +0.05% track the performance of ten (10) listed equities on the 0.00 1,000 -2.00 Ghana Stock Exchange. Investors who do not know which 980 -4.00 individual stocks to invest in can use the UMB 10 Index as -6.00 960 a barometer for choosing their stock investments. In order -8.00 -4.98% 940 to give investors more insight into their investment -10.00 920 -12.00 decisions, we review the performance of the constituent 900 companies as reported in the financial statements on a quarterly basis. The index is currently posting a year-to-date GSE CI UMB 10 INDEX return of 0.05%, which compares favorably with the -4.98%
yield of the GSE Composite Index and the -2.09% yield of Graph 2 depicts the returns of the UMB 10 Index and the GSE Composite Index. the GSE Financial Index respectively. The UMB 10 Index continues to lead the GSE CI in terms of year-to-date returns.
Relevant Points: FOCUS OF OUR REVIEW
• The UMB 10 Index keeps pace with corporate actions The review starts with our recommendation for GCB and provide highlights of the including rights issues, bonus issues, IPOs, mergers and bank’s financial performance. This is followed by a brief analysis of the other developments on the Ghana Stock Exchange. macroeconomy and the banking industry. • It is calculated on a free-float adjusted market Key factors considered in arriving at the recommendation are explained with their capitalization basis, and component equities are corresponding ratings, followed by analysis of the financial statements. The rating selected mainly on liquidity basis. methodology, rating definitions and other relevant comparable multiples that Constituent Equities: supported our recommendation are subsequently discussed.
The following equities make up the UMB 10 Index: The review covers both valuation and valuation sensitivities of the target price of GCB shares. Also, it provides econometric modeling and insights into how some key • SCB, GOIL, CAL, EGH, GCB, FML, EGL, financial performance indicators affect GCB’s price, using data spanning over a 10- GGBL, SOGEGH and TOTAL year period. It ends by offering recommendations on how management can improve The security inclusion or removal test is carried out on a bi- the liquidity position of the bank. annual basis.
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GCB Q1 2019 REVIEW
Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
BUSINESS DESCRIPTION, RECOMMENDATION AND FINANCIAL HIGHLIGHTS
RECOMMENDATION GCB BUSINESS DESPRIPTION We rate GCB as a buy. This is driven by a number of factors, which we deem as GCB, a financial services institution, provides banking services to strengths and could have greater impacts than any weaknesses. These strengths corporates and individuals under the Ghana Banking Act, 2016 may give investors a better return on the stock by the end of 2019. The company’s (Act 930). Its services include commercial banking, corporate strengths can be seen in areas such as reasonable valuation levels, consistent banking, SME banking, amongst others. dividend payments, notable growth in profitability and earnings per share, and higher capital adequacy ratio well above the prudential requirement. Key Price Movement (2016-Date) weaknesses are the show of a weaker operating cash flow and a marked decline in 8.00 the liquid ratio during Q1 2019. However, in our opinion, the bank’s strengths 6.00 5.01 outweigh the identified weaknesses. 4.00
2.00 FINANCIAL HIGHLIGHTS
0.00 In order to make a well-informed decision, we encourage investors to read the 27-05-15 27-05-16 27-05-17 27-05-18 27-05-19 full financial analysis and valuation on pages 9 and 12 respectively in addition to
the highlights below: STOCK PERFORMANCE Y-T-D 9 Mnts 1-Year • GCB has improved earnings per share by 82% in the most recent quarter Price Change 9% -5.5% -22% (Q1 2019) compared to the same quarter a year ago. The company has GROWTH (%) demonstrated a pattern of positive earnings growth in most years, but for Q1-19 Q1-18 3Yr CAGR Revenue 36% -4% 14% 2017 and 2018 partly on account of the increased operating expenses that Net Income 80% -42% 3% was associated with the assumption of some assets and liabilities of the EPS 82% -42% 3% defunct UT and Capital banks. We expect the positive growth in Q1 2019 to RETURN ON EQUITY (%) GCB Ind Avg UMB 10 continue during the 2019 fiscal year. The bank increased its bottom-line by Q1 2019 5.19% 5.44% 4.97% earning GHS1.00 compared to GHS0.55 in Q1 2018. Q1 2018 3.24% 5.45% 4.65% Q1 2017 6.19% - - • The net profit growth in Q1 2019 outperformed compared to the banking
industry average. The net profit increased by 80%, when compared to the P/E COMPARISON same quarter one year ago; it improved from GHS36.64 million to GHS65.95
million. 10 • The Return on Equity (ROE) recorded a marginal gain from 3% to 5%; this 6 5 is at par with the industry average. Despite the moderate gain, it is indicative
of the bank’s profitability and growth potential.
GCB Industry UMB 10 Index • The capital adequacy ratio improved slightly from 21% to 22%, and compares favorably with the industry’s average of 21.7%. Also, the Non-
Performing Loans ratio remains unchanged at 8%.
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GCB Q1 2019 REVIEW
Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
ANALYSIS OF GHANA’S MACROECONOMY
Ghana’s economy is broadly divided into the Agricultural, at 8.125%; and USD1,000 million for a 31-year bond issued at 8.950% Industrial and Service sectors. The services sector is noted for its respectively. lion’s share of GDP, accounting for 45% of Q4 2018 GDP. The industrial and agricultural sectors follow with 34% and 21% Having seen a cumulative cut of 1,000 basis points from 26% between January respectively. According to the April 2019 GDP bulletin of the 2016 to Q1 2019, the policy rate is currently at 16%. Treasury bill rates have Ghana Statistical service, industry led growth, as it expanded by also registered significant reductions within the same period. The 91-day 8.9% ahead of the other sectors. This was followed by the treasury bill rate for instance, has been reduced cumulatively from 22.7% and services and agricultural sectors which expanded by 5.8% and is currently at 14.85%. The weighted average interbank lending rate, which is 4.4% respectively. The Ghana Stock Market plays a critical role the rate at which commercial banks lend to each other has also declined from in GDP contribution. Listed companies engage in diverse 23.5% to 15.6% within the period, reflecting policy rate movements. activities including: banking; manufacturing; telecommunication; However, reductions in average banks’ lending rate in response to the oil production and marketing; and insurance, which contribute significant policy rate cuts has rather been minimal, declining marginally from to Ghana’s GDP growth. 28.2% to 27.8% between January 2016 to Q1 2019.
Real GDP (by production) increased by 6.8% in Q4 2018, Government in the 2019 budget statement projected the economy to grow at compared to 5.5% in Q4 2017, on account of expansions in the 7.6% in 2019 and subsequently slow down to 6.9% and 5.6% in 2020 and mining and quarrying, health and social work, ICT and trade sub- 2021 respectively. Growth in 2019 is expected to be driven by inflows from sectors. However, Q4 2018’s GDP growth is lower than the 7.4% the oil sector and allocations to the special initiatives program which will cover recorded in Q3 2018. projects such as the “One-district-one Factory Programme”, “Planting for Food and Jobs” and the “Railway Development Programme”. On the currency front, heightened demand for hard currencies and speculative activities had a toll on the Cedi’s performance for Also, the successful utilization of funds inflow from the USD2 billion Sino most part of Q1 2019. As a result, the local currency registered a Hydro arrangement with China will support infrastructural developments cumulative depreciation of 5.13% against the Dollar; this is including works and housing, railways, roads, and other projects that will weaker when compared with the 0.18% appreciation during the elevate growth in the medium term. same period in 2018. We expect the effects of these to filter into the banking sector, if only financial However, the rate of depreciation moderated in the latter part of institutions take advantage to structure syndicated finance deals in support of the quarter; thanks to the US$ 3 billion Eurobonds issuance, various stakeholders and parties to the expected developmental projects. which were heavily over-subscribed by 7 times to the tune of US$21 billion and subsequently restored confidence in the local economy. The bonds were issued in three tranches with the following terms: USD750 million for a 7-year bond issued at 7.875%; USD1,250 million for a 12-year bond issued
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GCB Q1 2019 REVIEW
Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
ANALYSIS OF GHANA’S BANKING SECTOR PEER GROUP: Financial Services/Banking Ticker Price M-Cap PE Int. Net Profit According to the “Bank of Ghana March 2019 Banking Sector Report”, the (GHS M) Income (GHS M) stock of private sector credit grew by 0.2% in nominal terms from GHS33.15 (GHS M) billion in February 2018 to GHS33.23 billion in February 2019. In terms of GCB 5.02 1,327.65 5 360 66 sectoral credit distribution, the commerce and finance sectors had 23.2% of the ABG 4 695.79 3 95.6 25.03 share of credit, followed by services (22.3%); manufacturing (11.9%); and ADB 5.06 1,324.31 0.56 122.7 20.8 agriculture, forestry and fishing sectors receiving 4.8% respectively.
CAL 0.82 513.80 3 199.1 40.49 The report indicates that, capital adequacy ratio of the industry increased from 19.2% in February 2018 to 21.7% in February 2019. In our opinion, this EGH 7 2,257.86 6 246.81 97.87 increment is inadequate and not reflective of the recent recapitalization and RBGH 0.63 536.74 8 94.5 16 reformation program. Thus, we expected a higher capital adequacy ratio following the recapitalization exercise. SCB 21.8 2,937.74 8 160.84 87.6 High non-performing loans (NPLs) remain an elevated challenge in the banking SOGEGH 0.72 510.58 10 95.5 12.5 sector (the private sector accounts for 96.9% of NPLs) even though it has reduced from GHS7.4 billion in February 2018 to GHS6.63 billion in February 2019. We believe this is partly on impairment and reclassification of some assets. Ghana’s commercial banking sector is broadly made up of 23 banks; 9 of which are domestically controlled, with the remaining 14 being Confidence in the banking sector was dampened during the implementation of foreign-owned. Following the sector’s reforms from 2017 to 2018 reforms that was championed by the central bank to address some by the Bank of Ghana, the total branch network in the country vulnerabilities in the sector. These included risk management and supervision reduced from 1,546 in February 2018 to 1,225 as at the end of issues, related party transactions above board; regulatory non-compliance and February 2019. relatively lower core capital, amongst others; thus, creating uncertainties in the sector. At the end of the exercise, 7 banks were consolidated, 4 banks merged The banking sector is highly competitive on products, channels, in two separate merger transactions, 1 was downgraded to a savings and loans services, technology, payment platforms, among others. The biggest status and 4 are currently being supported with the GAT scheme. The players are Ecobank Ghana and GCB Bank, with total assets of Regulator has subsequently strengthened its supervisory role and is rolling out GHS11 billion and GHS10 billion respectively as at the end of Q1 key reforms, which in our view will contribute to a more robust and solid 2019. banking sector, capable of supporting all other sectors of the economy for sustained growth and development. The 23 banks generated a total of GHS2.17 billion in interest income as at February 2019, up from GHS2.04 billion in February, Out of a population of 30 million, over 7 million are unbanked and thus, do 2018. The increase in interest income together with containment of not have bank accounts. In an era of intense competition, this presents an operating expenses, resulted in a 31.5% growth in profitability from opportunity for operators in the sector to leverage on evolving banking GHS 418 million in February 2018 to GHS549.7 million in February channels and modules to reach out to untapped market segments. 2019.
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GCB Q1 2019 REVIEW
Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
GCB SHARES IN FOCUS: PERFORMANCE VS OTHER UMB 10 INDEX CONSTITUENTS
Some of the factors we considered before arriving at an opinion on GCB are highlighted below. In ABOUT GCB BANK addition to these factors, we valued GCB’s shares based on relevant multiples and conducted GCB was established in 1953, as the Bank of sensitivity analysis to test how sensitive the base case value is, to changes in the estimated multiples. the Gold Coast with government of Ghana The strengths exhibited on the latest financial statements were also considered. as the sole owner. The bank rebranded and INDICATOR SCORE changed its name to Ghana Commercial Bank in 1957 to focus on commercial Income 4.5 out of 5 stars Measures the 5-year annual dividend yield and payouts to investors. GCB’s banking, since Bank of Ghana had been 5-year dividend yield is higher than 90% of the companies in the index, and established to function as the regulator of its 5-year annual dividend payout ratio has beaten 80% of the companies we cover. the banking industry. It was admitted on the official list of the Ghana Stock Exchange on Return 4.5 out of 5 stars Measures the 10-year historical price movements and average return of the 17th May, 1996 to allow for public stock. The average return of GCB over the 10-year period is higher than participation which eventually diluted its 90% of the companies we rate.
ownership. Currently, government owns Growth 3.0 out of 5 stars 51%, while the remaining 49% are held by Measures the average growth of the income statement (revenue) over a 5- year period. On this indicator, GCB has a growth score better than 30% of the public. the stocks in the index. However, it recorded the highest revenue growth amongst the index constituents (i.e. 36%) during Q1 2019.
On August, 14, 2017, GCB assumed Efficiency 2.5 out of 5 stars selected assets and liabilities of the defunct Measures the strength and average growth of the company’s return on UT and Capital banks, following their invested capital, and asset turnover over a 5-year period. GCB has generated more income per cedi of capital than 40% of the companies in the index. liquidation by the Central Bank; this Its 5-year average assets turnover is greater than 30% of the companies we transaction subsequently increased its total cover.
branch network from 161 to 214. Profitability 3.0 out of 5 stars Measures the growth in recent reported profit as well as the 5-year average profit margin. On the profit growth score, the company has beaten 80% of GCB is the second largest bank in terms of the stocks in the index. assets after Ecobank Ghana. It is Its five-year average profit margin score is higher than 20% of the companies we cover. headquartered on the Accra High Street. Capital Adequacy 3.5 out of 5 stars Measures the company’s capital against its risk-weighted assets. GCB’s CAR is greater than 60% of the banks in the UMNB 10 index
Non-Performing Loans Ratio 5.0 out of 5 stars Measures the loans that are not performing or generating income against the total loan portfolio of the bank. Currently, GCB’s NPL ratio is better than all the banks we cover.
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GCB Q1 2019 REVIEW
Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
FINANCIAL ANALYSIS
INCOME STATEMENT The Statement of Operations - Healthy, Sound and Impressive Q1-18 Q1-19 Net Interest. Income 198.93 260.83 Net profit margin for the first quarter of 2019 improved to 19%, which is higher than the 14% (GHS mil) recorded the same period in 2018. Even though operating expenses increased further by 26% Revenue 259.54 353.68 Net Income 36.64 65.95 during the period, profit after tax (PAT) improved significantly by 80%, after it shrunk by 42%
in 2018. The profit recorded in Q1 2019 is the highest in three years; thanks to the increase in BALANCE SHEET net interest income, decline in interest expenses as a result of the favorable interest rate Q1-18 Q1-19 Cash balances (GHS mil) 1,086.48 1,482.57 environment for banks, and increase in revenue during the period under review. Total Assets (GHS mil) 9,548.05 10,827.65 Total Equity (GHS mil) 1,151 1,391 During the same period, the bank reported an impressive net trading income, which grew
significantly by 178%, after strengthening by 59% in 2018. Also, impairment charge for loans PROFITABILITY decreased from GHS25.9 billion to GHS24.6 billion; this represents a marginal improvement Q1-18 Q1-19 Net Int. Margin (%) 77 74 of 5% over the 2018 level, and reflects why the NPL ratio is unchanged at 8%. From our Earnings before tax 20 26 margin (%) assessment, both top-line and bottom-line items on the income statement were healthy, sound Net Profit Margin (%) 14 19 and impressive. Net Profit Growth (%) -42 80
The Balance Sheet- Balance Sheet size has improved generally, but liquidity position EFFICIENCY has declined Q1-18 Q1-19 Ret. on Avg Assets (%) 0.5 1 The size of the bank’s balance sheet grew by 13% (GHS10.8 billion), but is lower than the 30% Return on Equity (%) 3 5 average growth recorded from 2016 to 2018. Currently, customer deposits are approximately
Asset Turnover (%) 3 3 GHS8.1 billion, an increase of 25% over the Q1 2018 level, chiefly driven by the enhanced retail Cost to Income (%) 80 74 and corporate collections on the bank’s collection platform.
ASSET QUALITY The cost to income ratio has declined from 80% to 74%, which indicates that, the after effects Q1-18 Q1-19 of the expenditure incurred by the bank after its assumption of selected assets and liabilities of NPL Ratio (%) 8 8 CAR (%) 21 22 the defunct UT and Capital banks in 2017, which contributed to the loss in earnings in 2017 is Liquid Ratio 99 124 gradually been moderated. The operating expenses to assets ratio was however unchanged at 2%. MARKET DATA Q1-18 Q1-19 Shares outstanding (mil) 265 265 Within the same period, shareholders’ funds increased by 21% to GHS1.3 billion, making GCB EPS (GHS) 0.55 1 the most capitalized bank in Ghana. Even though the return on equity increased marginally Annual Dividend Rate 0.10 0.30 (GHS) from 3% to 5%, in our opinion, it is indicative of the bank’s profitability and growth potential Book value per share 4.34 5.25 going forward. Also, return on asset improved marginally from 0.5% to 1%. Avg Daily Volume
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GCB Q1 2019 REVIEW
Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
FINANCIAL ANALYSIS - CONTINUED
A major weakness is the show of a significant decline in the liquid ratio, from 124% in March Capital Adequacy Ratio 2018 to 99% in March 2019. This could be partly attributable to the purchase and assumption transaction involving selected assets and liabilities of the defunct UT and Capital banks in 25.15% 22.00% 2017. 20.50% 17.90% Asset Quality - CAR well above regulatory requirement; and NPL ratio shows low 13.35% 10% credit risk exposure
The bank’s capital adequacy ratio increased marginally from 21% to 22%; this is significantly above the regulatory requirement of 10%, and is proof of its ability to protect depositor’s CAL EGH GCB SOGEGH SCB Regulatory funds and also absorb significant losses before becoming insolvent. Also, pointing to a low credit risk exposure is the relatively lower non-performing loans (NPL) ratio, which remains NPL Ratio unchanged at 8%. The NPL ratio is the lowest amongst the banks in the UMB 10 Index.
25.15% Market Data- Current figures compares favorably with previous levels
GCB opened the year at GHS4.60 per share and closed the first quarter at GHS4.00; 13.50% 11.67% representing a decline of -13%. Currently, it is trading at GHS5.02, indicating a year-to-date 9.40% 8.00% return of 8.9%, above the GSE CI’s –4.49% and the UMB 10 Index’s 0.04% respectively. Liquidity in GCB’s shares remain upbeat, reflected in increased trading activity during the quarter. In all, a total of 860,506 shares valued at GHS 3,570,373 were traded during the CAL EGH GCB SOGEGH SCB period.
Stated Capital The price to book ratio is 0.9, which is the lowest in 5 years (Q1 basis). Despite its decline from the 2018 level of 1.40, we do not conclude that investors are unwilling to pay a premium 500,000 for the bank’s shares than its net assets are worth. In our opinion, the bank’s shares are 400,000 416,641 404,245 400,000 currently selling for less than its net assets are worth.
Driven by 80% improvement in after tax profit, earnings per share increased by 82% from GHS0.55 to GHS1.00. The price to earnings ratio (5) is at par with the overall industry average of 5. Overall, the current market data for GCB looks better than Q1 2018 figures.
CAL EGH GCB SOGEGH SCB
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GCB Q1 2019 REVIEW
Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
ADDITIONAL MULTIPLES CONSIDERED IN ARRIVING AT A BUY OPINION
RATING METHODOLGY Price/Revenue 1 2 3 4 5 Price/Book 1 2 3 4 5 Premium Discount Premium Discount The UMB 10 index rating model GCB: 1.1 Peers: 2.0 GCB: 0.95 Peers: 1.2 utilizes a number of market • Discount: On this score, GCB is trading at a • Discount: On this measure, GCB is trading at a multiples to project the value and discount (i.e. lower) to its peers in the UMB 10 Index. discount (i.e. lower) to its peers in the UMB 10 Index. • The lower the P/R ratio compared to its peers, the • Traditionally, any value under 1.0 is considered a good return of an equity over a 1-year more attractive the stock, hence the high score (4) P/B value for investors seeking lower market values per period. The model also tests the for GCB. cedi of equity on the company’s balance sheet, hence sensitivity of projected values and • The P/R ratio shows how much the market values the high score (4) for GCB. returns to likely changes in every cedi of the company’s revenue. • The P/B compares the market value of the company to its book value estimated multiples, thus providing
a more complete analysis. Price/Earnings 1 2 3 4 5 Price/Projected 1 2 3 4 5 Premium Discount Earnings Premium Discount In rating a company, our GCB: 5.0 Peers: 6.2 GCB: 4.8 Peers: 5.8 • Discount: GCB is trading at a discount (i.e. lower) • Discount: GCB is trading at a discount (i.e. lower) methodology makes use of both compared to its peers in the UMB 10 Index. compared to its peers in the UMB 10 Index. A lower objective and subjective factors. • A lower P/E ratio than its peers can indicate a less forward price to earnings ratio than its peers can signify Some objective considerations expensive stock, hence the high score (4) for GCB a less expensive stock, hence the high score (4) for include the overall financial health • The P/E ratio shows the cedi amount an investor can GCB. expect to invest in a company to receive a cedi of the • The forward price to earnings ratio is based on the of the company as exhibited on the company’s earnings current price against our projected earnings for the financial statements over a period company of time; revenue and earnings Earnings Growth 1 2 3 4 5 Revenue Growth 1 2 3 4 5 growth; historical dividend payouts; Lower Higher Lower Higher cash flows; amongst others. GCB: 0.8 Peers:0.4 GCB: 0.36 Peers: 0.2 Subjective factors include; expected • Higher: Substantial earnings growth rate can • Higher: A higher revenue growth than the industry dividend payments, estimated contribute to capital appreciation, and also justify average can signify that the company is increasing its profits, investor sentiments, and higher PE ratios market share expected interest rates on the • GCB recorded an elevated earnings growth of 80%, • GCB has recorded 36% growth in revenue against the compared to the average growth of 40% of its peers average 20% growth posted by its peers in the UMB 10 money market, amongst others. in the UMB 10 Index Index
The combination of these Price/Cash Flow 1 2 3 4 5 considerations provides a more Premium Discount GCB:3.55 Peers:2.6 comprehensive approach in giving • Premium: On this score, GCB is trading at a an opinion and rating the stocks premium (i.e. higher) to its peers in the UMB 10 accordingly. Index • However, a lower P/C ratio is better than a higher ratio, hence the lower score (2) for GCB • The P/C ratio compares the company’s market value to its operating cash flows over the last four quarters. It shows how much cash the company generates relative to its stock price and how much investors are willing to pay for every cedi of operating cash flow.
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GCB Q1 2019 REVIEW
Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
RATING DEFINITIONS AND VALUATION
BELOW IS THE RATING DEFINITION OF THE UMB 10 VALUATION INDEX SERIES Base Case Opinion Rating Definition A+ We expect the price of this stock to Using historical and recent trends in selected market parameters, we appreciate and post a return of more systematically estimated the year-end target price of GCB. Investors must than 50% by year end note that, we applied the trading multiples approach and did not perform A We expect the price of this stock to discounted cash flow analysis, mainly due to lack of information on the appreciate and post a return between 40% and 50% by year end company’s future capital expenditure requirements, and other key income valuation parameters. Our base case value for GCB, based on the estimated A- We expect the price of this stock to appreciate and post a return between trading multiples approach by year- end 2019 is GHS6.20; which indicates a BUY 30% and 40% by year end return of 24% above the current price (GHS5.02). This falls within the B+
B+ We expect the price of this stock to rating category. appreciate and post a return between 20% and 30% by year end Valuation sensitivities
B We expect the price of this stock to We conducted sensitivity analysis in order to gain an insight into how appreciate and post a return between sensitive the target price is, to changes in the estimated trading multiples. This 10% and 20% by year end was based on two scenarios which are briefly highlighted below: B- We expect the price of this stock to appreciate and post a return between Case 1- What if GCB achieves only 90% of estimated multiples? 1% and 10% by year end
• Result: In this case, the year-end target price of the company will
C+ We do not have a convincing basis to be higher than the current price by 12% C arrive at either a buy or sell opinion. HOLD C- This is because, anticipated D+ appreciation is likely to be neutralized Case 2 – What if GCB achieves only 80% of estimated multiples? D by possible loss in value D- • Result: In this case, the year-end target price of the company will E We expect the price of this stock to be lower than the current price by 0.40% decline by 1% to 10% by year end From the above cases, the target price of GCB’s shares is highly sensitive to SELL E- We expect the price of this stock to decline by 10% to 20% by year end a decrease of 20% or more in the estimated multiples. We encourage investors to be guided by these cases accordingly before making any investment F We expect the price of this stock to decline by more than 20% by year end decision.
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GCB Q1 2019 REVIEW
Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
ECONOMETRIC MODELING AND STATISTICAL INSIGHTS- THE DRIVERS OF GCB’s PRICE
This section is purely a research and statistical one, and focuses on the effect of key performance indicators on the share price of GCB Bank, using annual time series data spanning over a 10-year period (2008-2018). The independent variables used were earnings per share, price to earnings ratio, dividends and return on assets.
Using EVIEWS, the research employed the Ordinary Least Squares Regression (OLS) model in examining how the independent variables affect the dependent variable (price). The OLS method was employed because of its simplicity and its ability to reveal which variable has a more significant impact than the other variable.
The model is specified as follows:
Share Pricet = βo + β1 Dividendt + β2 Price to Earningst + β3 Earnings Per Sharet + β4 Return on Assetst + eit
We carried out a model diagnostic test to ensure that the conditions that must be satisfied for the OLS estimation result to be efficient and unbiased were met, before employing the OLS method.
OLS Estimation Results
Explanatory Variable Coefficient Standard Error T-Statistic Constant -0.996 0.794 -1.255 Earnings Per Share 6.830*** 1.208 5.652 Price to Earnings 0.113** 0.037 3.056 Return on Assets 47.044** 16.446 2.860 Dividend -14.626** 4.332 -3.377 Adjusted R-Squared 0.866 Note: Price is the dependent Variable; *** and ** represents statistical significance at 1% and 5% respectively
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Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
ECONOMETRIC MODELING AND STATISTICAL INSIGHTS- CONTINUED
DATA INTERPRETATION
Adjusted R-Squared
The Adjusted R-Squared is 0.866. This means over the 10-year period, statistically, 86% of changes in GCB’s share price has been as a direct result of changes in the independent variables used (i.e. earnings per share, dividends, price to earnings and return on assets). The 86% is impressively high; therefore, it will be imperative for management of the bank to pay much attention to these variables when making decisions that have implications on the share price.
Earnings Per Share (EPS)
From the results, EPS has a positive effect on the price of GCB with a coefficient of 6.830, and statistically significant at 1% significance level. This result implies that, a 1% increase in earnings per share causes the price of GCB to increase by 6.83%. Amongst all the independent variables used in the study, earnings per share has the least margin of error; thus, its impact on the price of GCB is the most statistically significant.
The implication of the result is that, management of the bank must embark on policies that will increase revenue, while minimizing operational costs, in order to increase profit to boost earnings per share. This will subsequently translate to capital appreciation in the price of GCB.
Price to Earnings
From the study, price to earnings ratio was found to have a positive relationship with the price of GCB’s shares. The result shows that, a 1% increase in the PE ratio leads to a 0.113% appreciation in the price of GCB. This is significant at the 5% level of significance, and is in line with finance and valuation theory which stipulates that, an increase in the PE ratio could mean that investors are willing to pay a higher price because of future growth expectations, which subsequently leads to price increases.
Dividend
Surprisingly, dividend was found to have an inverse relationship with the price of GCB. This does not mean that dividend payments cause GCB’s price to decline. Over the period, when dividends are announced, investors tend to demand more of the shares in order to qualify and participate in the receipt of dividends; this eventually pushes the price of the stock higher. At a point in time when investors feel the stock has posted much capital appreciation or returns, they (investors) seek to book profit by placing their shares for sale, which eventually cause a decline in the share price due to the excess supply. Management of the bank should also note that, the inverse relationship indicates that, a decline in price should trigger an increase in dividend payment.
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GCB Q1 2019 REVIEW
Sector Ticker Price as of Annual Dividend Beta Standard Market Shares 52 Week Range 27/05/19 Rate Deviation Capitalization outstanding
Financial Services: Banking GCB GHS 5.02 GHS 0.30 0.69 0.02 GHS1.32 Bn 265 Mn GHS3.5-GHS6.5
RECOMMENDATION TO IMPROVE THE BANK’S LIQUIDITY POSITION
A major weakness that was found on the bank’s financial statements during the Q1 2019 period is the significant decline in the liquid ratio by 25% from 124% in Q1 2018 to 99% in Q1 2018.
In this section, we focus on a brief discussion of Basel III Liquidity Requirements and suggest measures that management of GCB may adopt to improve the bank’s liquidity position.
BASEL III LIQUIDITY REQUIRMENT
Basel III is an internationally agreed set of measures and standards developed by the Basel Commission on Banking Supervision in response to the financial crises of 2007-2009. Its purpose is to strengthen the regulation, supervision and risk management of banks. The standards are minimum requirements which apply to internationally active banks.
The Basel III liquidity Rules consist of two ratios; these are:
The Liquidity Coverage Ratio (LCR)
This is a stress test that is intended to position a bank to have the necessary cash sources in order to survive a 30-day market crunch. Thus, it ensures that a bank has adequate unencumbered high-quality liquid assets (HQLA) that can be easily converted into cash to meet its liquidity needs over a 30-calendar day period. The LCR was adopted in 2013 with a minimum requirement of 100% effective 1st January, 2019.
The Net Stable Funding Ratio
This ensures that a bank’s assets would be adequately supported by stable funding sources and prevent banks from engaging in excessive maturity transformations. Its purpose is to reduce the possibility of disruptions to a bank’s regular funding sources, that could dampen its liquidity by requiring banks to maintain a stable funding profile relative to their on-and off-balance sheet activities.
OUR RECOMMENDATION
Based on our findings, we recommend the following measures to the management of GCB in order to improve the liquidity position of the bank:
1. Reduce maturities of assets 2. Lengthen maturities of liabilities 3. Reduce contingent commitments 4. Secure liquidity protection 5. Improve average assets liquidity
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CONTACT PERSONS
Enquiries about the UMB 10 Index should be addressed to:
Wilfred Agyei Senior Analyst-Corporate Finance and Research UMB Investment Holdings Limited [email protected]
Rudolf Cofie Research Analyst- UMB Stockbrokers Limited [email protected]
Brenda Gyimah Client Service Officer UMB Investment Holdings Limited [email protected]
Disclaimer This document is not intended to be an offer, or a solicitation of an offer for the sale or purchase of any security. The information and opinions contained in this document have been compiled from or arrived at in good faith from sources believed to be reliable. Whilst care has been taken in preparing this document, no representation is given and no responsibility or liability is accepted by UMB Investment Holdings Limited and UMB Stockbrokers Limited, any member of UMB Investment Holdings Limited or UMB Capital as to the accuracy of the information contained herein. All opinions and estimates contained in this report may be changed after publication at any time without notice.
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