Thursday, May 07, 2014 12:24 AM / TheANALYST
Key highlights (Industry & Operating Environment)
We consider Zenith Bank to be currently trading a moderate discount to its BVPS of N17.60, when compared with its market price of N17.00 as at March 19th 2015.
Also, the PE ratio 5.67 which is more or less at par with the sector average of 6.89, further reflects moderate expectation from investors as regards to future earnings.
In this regard, we commend the sustained moderate growth in both revenue and bottom-line of the bank, recording 14.76% and 4.34% on year-on-year basis respectively. The performance has been largely attributed to improved operating efficiency and sustained loan growth according to the management of the firm
Furthermore, the key fundamentals of the bank remained firm despite growing challenges in the sub-sector. The key investment indicators of the bank are conformably trading above sub-sector performance. The bank’s EPS and Earning’s yield is currently trading at N3.17kobo and 17.64% while both the PAT Margin and dividend yield closed among leading peers that have presented their Q4’14 earnings report.
However, we are concerned about the weakness observed in the performance of Net Interest margin, which declined to 3.4% against 8.7% recorded in the previous year comparable period. This indicates high interest expenses, which could be traced to high cost of funds.Though; this has been attributed to the increase in CRR by CBN during the financial year.
Income Stream Review
Both top-line and bottom-line maintained gradual decline on QoQ basis
We observed sustained gradual falling pattern in both top-line and bottom-line of the bank in the last three quarters.
However, we commend the year-on-year performance outlook of the bank. The bank maintained a modest growth of 14.76% (YoY) in its gross earnings against 14.45% recorded in 2013 while the PAT came out of negative growth of -5.33% (YoY)recorded in 2013 to close at 4.34%.
The bank also sustained PBT growth by 8.32% (YoY), just as it closed with 8.32% growth in 2013. This indicates pressure from income streams, which could be traced to increased cost of funds- the net interest margin was adversely affected as noted above. Also, the growth in cost-to-income ratio to 57.74% against 57.10% and decline in PAT margin from 27.12% to 24.66% further buttress this fact.
However, we commend the healthy posture of the core income stream of the bank as interest income closed with an impressive performance of 47% (YoY) against 24% (YoY), driven by impressive performance observed in deposit and loans and advances. In a similar fashion, we observed sustained healthy growth in non-income segment of the bank.
Operating Expenses & Operating efficiency Review
High interest and Operating expenses post threat to bottom-line
We observed sustained moderate growth in operating expenses while a significant surge in interest expenses was observed.
The operating expenses climbed up to 6.59% (YoY), which could be reasonably traced to the aggressive initiatives to ease the effect of stiff monetary control from CBN and increased cost of funds. However, we consider this a better outlook when compared with 37.08% growth recorded in Q4’13
On the other hand, the operating efficiency of the bank appeared to be under pressure, considering the moderate growth in cost-to-income ratio to close at 57.74% (YoY) against 57.10% (YoY) recorded in Q4’13.
Also, the decline in net interest margin and PAT margin further reflects weakness in the operating efficiency of the bank. The significant surge in interest expenses by 51.02% (YoY) from 9.66% growth (YoY) recorded in Q4’13, with a corresponding sharp decline in income from T-Bill gives us concerns, which may continue to increase pressure on bottom-line of the bank.
Assets Quality and liquidity posture
Impressive total assets growth but liquid assets surprisingly closed weak
We observed that the liquidity assets of the bank closed weaker with 9% growth against 22% growth recorded 2013 (YoY) due to continued decline in investment in T-bills. Though, we commend the improved cash position with a growth of 57% (YoY) as against 6% (YoY) growth recorded in the previous year comparable period.
However, the assets base of the bank remained strong and robust with sustained growth of 19.48% (YoY) in total assets against 20.68% recorded in 2013 (YoY) with similar pattern on QoQ basis in the last three quarters.
The bank retained healthy growth in its deposit and loan book to close with 11.44% and 38.21% on year-on-year respectively- an indication of sustained depositors’ confidence and healthy market share. The deposit-to-asset ratio of 67.57% further confirms this, revealing solid liquidity posture of the bank. Though, we consider this very high, the bank needs to be more conservative. This may create liquidity challenges for the bank in taking advantage of emerging opportunities within the industry, which may consequently hamper the organic growth of the bank.
Lastly, we commend the significant decline in NPL ratio, which closed at 1.80% against 2.91% recorded in 2013 comparative period. This further indicates improved assets quality and risk management strategy of the bank.
The bank maintained a leading profile within the industry as its gross earnings posture closed above sector average.
The bank grossed N403.34billion in Q4’14 as against sector average of N309.02billion based on the results released so far.
However, the bank's PAT Margin closed below sector average (based on the results released so far). Though, it PAT margin still closed among the sector leaders, recording 24.66% against sector average of 25.870%.
1.Analysts retain NEUTRAL rating on Zenith Bank Plc post Q1 results
2.Analyst gives a BUY Rating on Zenith Bank Plc on Q1 2015 Results
3.ZENITHBANK Rated NEUTRAL After The Release of Q1 15 Result PBT Grows by 15 YoY
4.ZENITHBANK Records 14 Growth in Interest Income in Q1 2015