Zenith Bank Plc - Peak of the Pack?


Thursday, November 03, 2016 2:23pm/ GTI Research

Investment Highlight

9M -2016: Gross Earnings up 12.9%, net income by 20.44%, boosted by FX revaluation gains

Zenith Bank (‘’The Company’’) released its interim 9M -2016 result for the period ended September, 30 2016 on 24th October 2016.

The Company reported a 12.9% rise in gross earnings to N380.35billion ($1.19B) from N336.85billion ($1.05B) YoY, which was translated to a 20.44% rise in net income to N100.07billion ($312.97M) from N83.09billion ($259.85M) YoY.

The growth in gross earnings is adduced to the bank’s ability to create risk assets which boosted Interest income. The Bank’s Loan book expanded by an impressive 31.7% between September 2015 and September 2016.

Cost of fund was remarkably constant, recording only a marginal 0.55% rise YoY, ensuring a 17% growth in net interest income. Operating income was up by 18.8%, while operating expenses rose at a much slower 11% YoY.

Cost to income ratio consequently settled at 49.7%, down from 53.17% in September 2015. Pretax profit widened by 16.55% to N121.27billion ($379.28M) from N104.05billion ($325.42M) while net income rose by 20.44% to N100.07billion ($312.97M) from N83.09billion ($259.85M).

FX revaluation gains which expanded by 323% to N31.02billion ($97.00M) from N7.32billion ($22.94M) was a major boost to net income in the review period.

Balance sheet dynamics
Cash and Bank balances with the CBN which traditionally attracts lesser interest income was down very marginally by 1.63% YoY. The Bank was aggressive with deploying its assets in higher yielding investments. Treasury bills exposure which increased by 18.93% and loans and advances which rose by 31.71% were the beneficiaries of this aggression.

The Bank reduced its investment securities (largely comprising debt securities) by 10.33%, inter Bank placements dropped by 3.55% in the review period.

The bank largely only tinkered with its treasury bills exposure and risk asset creation in the review period. The balance between safety and high margin risk asset creation is really impressive, considering the bank’s apathy for risk. What was also impressive is the comparatively low impairment charge to total loans and advances which speaks to the efficacy of its risk assessment framework.

We are also very impressed with Bank’s focus on the shorter term treasury bills as against the longer term Bonds. It is our opinion that at some point soon, the MPR will be reduced to accommodate cheaper government borrowing and we think the bank is already preparing its balance-sheet for that eventuality while leveraging on the opportunities the high rates presents in the short term.

Strength in Margins
The lender reported positive YoY margin movements with Net interest income margin strengthening to 66.45% from 62.87% while pre-tax profit margin rose to 31.88% from 30.89% YoY. Net income margin also improved to 26.31% from 24.67%

Valuation Analysis
Based on our analysis, the stock is currently trading at a 48.68% discount to our estimate fair value of N22.02, with a 12Month investment horizon. In arriving at our fair value for the stock, we focused on the historical financial performance of the stock and our expectations for FY 2016.

Our fair value for Zenith Bank shares was calculated using the Price to Book Value method of valuation as well as the Dividend Discount Model comprising our expected dividend estimate for the Bank and a GTI Securities customized tweak to adjust for the risk of investing in the Nigerian Financial Services sector.

Our Required Rate of Return (RROR) factors in a risk premium of 10% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return.

We have placed a POSITIVE rating on the stock of Zenith Bank

Our FY 2016 gross earnings forecast for Zenith Bank is N475.79 billion ($1.488B), while our net income estimate for FY 2016 is N120.09 billion ($375.7M). This yields an EPS of N3.82 and a forward P/E of 3.86X.

We expect the bank’s shareholders funds to close the year at N714.37billion ($2.23billion) amounting to a 25% rise from the position as of FY 2015 and 2.7% rise from the position as of 30th September 2016. Our net book value per share estimate is N22.75, which produces a forward P/BV of 0.66 and ROE of 16.81%.

We are impressed with the banks pro-activeness in the deployment of its balance sheet in the period ended 30th September 2016.

The growth in the banks’ loan book and the reduction in its exposure to long term bonds while focusing on the shorter tenured treasury bills aligns with our expectation that the MPC may cut rates very soon (the first MPC meeting for 2017) to stimulate real sector growth through increased government borrowing and capital expenditure.

Investment Conclusion
Despite the rising impairment charge in the 3rd quarter, the growth in the book value position of the bank is impressive and provides adequate buffer to protect the bank form capital adequacy concerns.

We are also impressed by the uncharacteristic expansion in the banks’ loan book in the review period, a trend which started in Q2 -2016. The bank is historically known for its conservativeness in risk asset creation. Our opinion is that due to the economic recession, financial institutions like banks will struggle.

Also considering that their stock in trade in cash, the distressed economy will heighten their counter party risk and makes them susceptible to higher impairment charge.

However, we believe that the large banks have more capacity to absorb associated economic shocks. We have a BUY recommendation on the shares of Zenith

Investment Risk
Policy changes: the potential for a rapid change in monetary policy heightens the risk of underperformance.

Operational: inefficient deployment of balance sheet assets and potential rise in NPL are all areas that can potentially alter our forecasts


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