ZENITH BANK PLC: Margins under Pressure as cost of funds Heightens interest expenses


Thursday, May 07, 2014 12:24 AM / TheANALYST


Key highlights (Industry & Operating Environment) 

  • The Nigerian economy remains undiversified, majorly driven by the oil sector. The ongoing economy slow down is induced by oil price. The Nigerian economy growth rate has declined below 6% in December 2014,

  • The slowdown in economic growth is expected to continue in 2015 as both oil and nonoil sectors show strain amidst low oil prices, a weaker Naira and reduced access to credit.
  • Despite severe deterioration of other major indices inflation has remained in single digit averaging 8.0% in Q4 2014 (7.9% in Q4 2013), however some deterioration is expected in 2015 as a result of the devaluation
  • Oil prices bottomed out at $41.16/bl in January 2015 and appear to have stabilized- this is expected to trigger stability in naira and other key indicators
  • Foreign exchange reserves declined by 20.96% from Dec 2013 to Dec 2014. This has further declined by 10% as at March 2015, which can be attributed to drop in oil prices, weakened Naira and loss of investor confidence
  • In addition, the emerging realities in the economy put more pressure on money deposit banks in the year.
  • The New CBN governor (Godwin Emefiele) stopped charges on all cash deposit to put an end to multiple accounts- this could affect fees and commission of banks.
  • The CBN maintained its tightening stance with an upward review of Cash Reserve Requirement on public sector deposits to 75% while private sector deposits was moved from 15% to 20%. This may increase cost of funds & OPEX in the banking sub-sector.
  • CBN introduced the FX prudential guidelines, adjustments to Bank’s allowable Net Open forex Positions,

  • In order to maintain price stability and prevent further erosion of reserves, CBN closes RDAS window, resulting in a tacit devaluation
  • Despite severe deterioration of other major indices inflation has remained in single digit averaging 8.0% in Q4 2014 (7.9% in Q4 2013), however some deterioration is expected in 2015 as a result of the devaluation



Fundamental Analysis 

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.


Peer Comparison  

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%. 





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