•Zenith Bank Plc reported a 33% YoY rise in revenue to N72.4 billion for Q1 2012; decomposed into N66.7 billion and N5.7 billion from its continuing and discontinued operations, respectively. The bank had earlier announced plans to divest its non-banking subsidiaries in an effort to meet deadlines set by the regulator for banks that intend to offer only core banking services. This growth was however from a low base in Q1 2011; and revenues rose a moderate 18%QoQ.
•However, the 47% rise in interest income to N52.8 billion in Q1 2012 from Q1 2011 was the primary driver of revenue growth; non-interest income dipped by 20% to N13.8 billion -- a surprising departure from trend in a number of banks which generated considerable revenue from non-interest income in Q1 2012 on increased transaction throughput via expanded product channels and branch networks.
Significant asset restructuring •Balance sheet grew a fringe 1% to N2.4 trillion but evinced substantial redistribution on the asset side. Cash holdings dropped 22% QoQ to N173 billion in favour of more attractive money market assets – a phenomenon that we have observed among all the banks that have released Q1 2012 results thus far. Treasury bills and interbank placement rose 4% and 16% to N534 billion and N274 billion, respectively.
•Zenith Bank’s loan book and deposit base grew by 2% and 1% to N909 billion and N1.67 trillion, respectively; translating into a marginal 30bps rise in loan-to-deposit ratio to 54.4%. Since hitting the highest level in the bank’s recent history of 57% in H1 2011, Zenith has gradually cut back on its loan-to-deposit ratio.
•We estimate a 400bps improvement in the annualized yields on earning assets to 11% QoQ on the back of recent positions in the fixed income and interbank market. However, we doubt loans contributed significantly to NIM growth as stiffer competition for prime borrowers weighs on banks’ ability to re-price loans in the current high interest rate environment.
Mild deterioration in margins •Though we estimate 200bps and 100bps QoQ deterioration in liquidity and CAR to 59% and 28%, these are well above the 30% and 10% respective regulatory minimums leaving the banks’ potential for risk asset creation undiminished. However, recent trends suggest that the bank remains very cautious in this regard.
•However, cost-to-income ratio deteriorated by 400bps to 57% in Q1 2012 YoY as operating expense rose 6ppts faster than income. Nevertheless, a N1.2 billion impairment charge was 69% lower YoY, even as the bank’s NPL ratio improved 30bps QoQ to 3.7% in Q1 2012.
•PBT and PAT rose 25% YoY and 26% YoY to N23 billion and N19.2 billion for Q1 2012; but nevertheless resulted in a 2ppts and 1ppt deterioration in pre-tax and net margin to 32% and 27%, respectively. The result puts annualized ROE at 20%.
We revise forecast assumptions… •In reflecting the expected competition for prime credit and recent downturn in money market rates, we revised our forecast loan yields lower to 13% for FY 2012 which brings FY 2012 revenue forecast 5% lower to N264 billion, 8% higher than FY 2011
•We also revise our CIR forecast 100bps lower to match current 57%levels at from 58% reflecting the bank’s earlier than expected divestments from non-banking subsidiaries and the associated cost burden. We also factored a faster decline in CIR through FY 2014 as the bank focuses on its core banking business.
•These adjustments to our model variables translates to 41% and 35% YoY increase in PBT and PAT to N85.3 billion and N59.7 billion respectively for FY2012; a 2.5% decline from our previous forecasts.
…and our rating •These adjustments result in a 5% upward revision to our fair price estimate to N15.93 – 3% higher than today’s close. On a relative valuation basis, the bank trades at a forward PE and P/Bv of 7.6x and 1.2x which are higher than peer average at 4.9x and 1.1x, respectively. We revise our rating on the stock from overweight to NEUTRAL.
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