GT: The Super bank grows stronger

By TESLIM SHITTA-BEY
Two gangly friends had an idea that was totally ridiculous. The concept was brash and downright audacious; they wanted to start a bank, a brand new bank that would take on older institutions that had been around for about eight decades. Indeed two of the banks they wanted to battle had been around for so long that they were collectively twice the combined ages of both dreamers. GT Bank, Nigeria’s largest financial retail institution by market value, was and continues to be a product of Fola Adeola and Tayo Aderinokun (now late) in 1991 were boy scouts with manly aspirations. The bank they started 26 year ago, GT Bank, is now arguably Nigeria’s most consistently applauded commercial franchise and undoubtedly the highest valued bank listed on Nigeria’s N3.6 trillion Stock Exchange (NSE). In an interview with its pioneer chief executive officer, Adeola, in 2015 the pioneer managing director noted that, ‘GT Bank was an idea whose time had come, we noticed some competitive gaps in the way banking services were being rendered at the time and thought that plugging those holes could prove to be a sustainable enterprise. Fortunately we were right.’
According to Adeola, ‘we realized quite early that banks were made of a number of sub systems and to optimize the organization as a whole, we needed each sub system to be optimized, so that the managing director and his office was treated as a sub system, for example. My office was thoroughly interrogated for efficiency and effectiveness; we thought that if we got this correct, then the organization as an entity should run pretty smoothly and profitably. Maybe the jury is still out on our success but we think we did quite a good job’, he noted.
Fifteen years after Adeola’s decision to leave the bank, GT seems to have leveraged the optimization tactic to a point where it has sprinted ahead of the Nigerian banking marathon. By year ended 31st December, 2016 the banks new managers led by its third chief executive officer, Segun Agbaje (who took over from the late Aderinokun in 2011), had pulled total assets up by a stunning 63 per cent over a five year period from N1.6 trillion in 2012 to N2.6 trillion in 2016. As assets grew the management equally heaved up profit after tax by a robust 10.3 per cent on a compound annual basis. Year-on-year 2012 to 2016 the banks gross earnings rose by an average of 12.7 per cent from N1.6 trillion in 2012 to N2.6 trillion in 2016. The rise in gross Income shot the bank’s earnings per share (EPS) up by a dizzying 48 per cent from N2.91 in 2012 to N4.31 in 2016; one of the strongest growths in earnings by any bank in the country.
So far GT has done exceptionally well at its core business of lending as its net interest income (an index of the bank’s net earnings before consideration of other income and costs) rose from N145 billion in 2015 to N171 billion in 2016, reflecting a growth of 18 per cent. And perhaps more importantly the bank’s net interest margin (a measure of how crucial customer’s loans have been to the banks bottom line) was about 12.3 per cent in 2016 as against 11.7 per cent a year earlier.
Where the assets are and what they are doing
Unlike several other banks that had done a blazing dash for public funds in the early 2000’s GT kept true to a predominantly private sector philosophy. The bank’s assets have principally been in the area of Corporate and Retail Banking, with a large chunk of that business being corporate loans and advances; indeed between 2015 and 2016 about 69 per cent of its loans on average were to medium to large corporate ventures.
An attempt to break out of the corporate banking mould almost blew up in its face in 2003 when it took a hundred per cent stake in Magnum Trust Bank (MTB) known for its growing retail banking brand. The attempt was one of GT’s worse missteps to date. Within the short period of a year it became evident that the acquisition was not going to work, it was a dud; cultural differences and brand dilution concerns made the takeover dangerous and potentially damaging. In 2004 the bank sold off Magnum and quickly consolidated its hold on the corporate banking market. So far the gambit has paid off. But the bank has also reinforced its retail activities as retail assets rose from 13.8 per cent in 2015 to 17.1 per cent in 2016. The rise in retail activities relates to greater aggression on the part of the bank to increase market share in this segment of the business. Taking a lesson from the earlier Magnum Trust Bank fiasco, rather than attempt to acquire a pre-existing retail banking franchise and dilute service quality, GT’s new managers decided to grow the banks retail business organically.
This explains the banks 8 per cent growth in retail liabilities (that is deposits) between 2015 and 2016. The banks retail liabilities grew from 36 per cent of total liabilities in 2015 to 38.7 per cent of total liabilities in 2016. Optimising operations for GT has, therefore, involved the bank cutting down its interest cost (by attracting cheaper retail deposits) and widening its net interest income (reflecting a grand effort at improving the banks operating margin); this has established a cost effective balance between the bank’s assets and liabilities which shows up as wider income margin between 2015 and 2016.
Analysts, however, note that the current problem with the bank’s financials is not its growing liabilities but its rising loan loss provisions. Impairment charges rose by a staggering 426 per cent between 2015 and 2016, rising from N12.4 billion in 2015 to a thumping N65.3 billion in 2016. The good news is that the bank seems to have taken a fist to the problem as first quarter (Q1) 2017 provisions were just 13 per cent higher than Q1 2016, the banks provision went up from N3.4 billion in Q1 2016 to N3.8 billion in Q1 2017. The slower loan provisioning should translate into higher after tax earnings by the year end 2017 enhancing corporate value for all stakeholders.

Getting comfortable with liquidity
The fact that the bank has relied more heavily on a corporate banking business model rather than a public sector-dependent one has helped avert the problems of rivals who had found themselves going down dark alleys as a result of their reliance on public cash. Segun Atere, head portfolio strategist at Imperial Asset and Trust, notes that, ‘the treasury single account (TSA) policy of the federal government was like a wrench slammed into the gut of banks. The withdrawal of public funds in 2015 sent the books of several banks diving into pools of red ink. Indeed many banks had to accept unusually high interbank takings as they bore the consequences of the rising cost of funds’. According to Atere, ‘GT escaped the mayhem because its deposits were mainly private’.
To consolidate its non-public deposit credentials the bank has gone into a massive mobilization of retail customers especially those likely to open savings accounts which the bank considers more operationally inexpensive and stable. Business Hallmark estimates that in Q1 2016 the banks liquid (short term assets before consideration of loans and advances) to total asset ratio was 34 per cent similar to its ratio in the contemporary period of 2017. Interestingly the bank appears to have become more conservative with its asset creation efforts by scaling back the derivatives component of its short term balance sheet assets by scaling down derivative instruments from over N1billion in Q1 2016 to N357million in Q1 2017, a slide of 66 per cent.
Slowing debt…a Damascene moment?
GT in 2015 cranked up corporate debt by borrowing a princely N250 billion to support its operations, this became the beginning of a trend; like a shark tasting blood the bank went into a borrowing loop. In 2014 its debt went up by 4 per cent to N261billion before shifting to a further gear in 2015 rising to N347.16 billion, representing a two year growth of 39 per cent. In 2016 the banks debt stalled somewhat at N347.55 billion. Business Hallmark estimates that in 2017 GT’s debt could drop a notch to N345.56 billion barring any sudden desire to take on more dollar loans from foreign markets. The relative stability of the foreign exchange market and the glum outlook for the oil sector may have compelled a less aggressive approach to dollar borrowings. Analysts believe that GT may have had a Damascene moment where sober and slow growth of Gross Domestic Product (GDP) suggests that external borrowings in foreign currency could be a tricky enterprise.
With deposits of N2trillion the banks debt is not a matter for worry. GT’s debt is adequately covered by its equity and liquid assets. Nevertheless, the bank may need to slow down on taking dollar denominated loans to lend to local companies that generate their revenues in naira. The ongoing power sector challenges and the troubles in the telecommunications sector clearly lay out the possible difficulties that could occur with such lending mismatch.
Dreams work
Two young men set out with a dream to dominate an industry they saw as ripe for change. Fola was cerebral, conservative and strategic, Tayo was bold, hands-on and a legwork giant, the combination was one of the best unions ever concocted in corporate Nigeria. Twenty five years after the original audacity to believe, the bank both men established is at the pinnacle of its strength, it dominates the Nigerian financial landscape like a colossus and shows no signs of slowing down any time soon. According to Adeola, ‘growth and efficiency is now visceral it is part of the banks DNA’.