Zenith Bank: equity analysts maintain strong Buy rating on excellent balance sheet
Research equity analysts’ notes on Zenith Bank Plc recent first quarter performance pointed that lender’s bolster earnings with foreign exchange revaluation gains. At the close of the market in April, Zenith stock traded at ₦14.30, about 46% below ₦31.26 target price set by analysts at Greenwich Trust Limited.
In its review, analysts harp on modest earnings growth buoyed by revaluation gains. FSDH Merchant Bank equity research analysts rated Zenith stock among its top 10 picks with a 19.9% dividend yield. However, a number of analysts maintain a neutral outlook based on technical indicators reading.
Analysts stated that the stock is undervalued with an excellent balance sheet – statement of financial position. The group that recently published its Q1 2020 unaudited financials for the period ended 31st March 2020, recorded a 5.50% growth in topline.
Gross earnings expanded from ₦158.11 billion in Q1 2019 to ₦166.81 billion in Q1 2020, largely driven by the growth in non-interest income by 42.82%.
MarketForces recalled that lender has started emphasizing interest in the retail end as it raised investment in e-business platforms. the core banking activities, interest income declined by 6.65% from ₦122.48 billion to ₦114.33 billion in Q1 2020.
Analysts attributed this to a 36.09% reduction in interest on treasury bills which dropped to ₦15.30 billion from ₦42.40 billion in Q1 2019. Analysts held that the drop is due to the lower yields on government securities in the period. Moreover, the bank’s investment in treasury bills dropped mildly by 2.76%.
Meanwhile, interest on loans and advances granted, coupled with interest on government bonds, placement with banks and discount houses spiked by 15.84% to ₦67.54 billion, 22.69% to ₦20.43 billion and 81.61% to ₦88.88 billion respectively.
But couldn’t lead to positive growth in interest income.
On a positive note, interest expense declined by 9.67% from ₦36.34 billion to ₦32.82 billion mainly driven by the drop in interest paid on current account (25.60% to ₦2.23 billion) and borrowed funds (38.97% to ₦10.96 billion).
Greenwich explained that the spike in interest income and impairment losses on loans consequently dropped the net interest income by 7.72% to ₦77.55 billion from ₦84.04 billion in Q1 2019.
The impressive growth in non-interest income by 42.82% to ₦46.63 billion in Q1 2020 was largely driven by the rise in trading gains. The trading gain was lifted by 98.02% to ₦15.46 billion and other operating income surged 345.69% to ₦15.73 billion.
Then, fees and commission declined by 27.57% to ₦15.43 billion.
Likewise, the 21.21% growth in income from treasury bills trading, and gains from derivative instruments supported the rise in trading income. Also, the gain in foreign exchange revaluation by 339.35%, drove the increase in other operating income, analysts remarked.
The bank’s operating expenses increased by 10.10% from ₦59.40 billion to ₦65.40 billion in Q1 2020, due to the increase in other operating expenses, depreciation and amortization cost.
However, personnel expenses dropped marginally by 0.73%.
In spite of this, cost failed to moderate as the lender’s cost to income ratio settled at 52.66% from 50.90% in Q1 2019. Consequently, the sustained rise in operating cost and tax expense pressured growth in profit before tax.
Zenith Bank pretax profit inched higher by 2.61% to ₦58.78 billion, and profit after tax only grew 0.58% to ₦50.52 billion. The review of the lender’s book also revealed that in the period, loans and advances expanded by 43.99% to ₦2.58 trillion from ₦1.79 trillion in FY 2019.
So, the loan to deposit ratio (LDR) stood at 57.84% when compared with FY 2019 which settled at 54.09%. On the other hand, the total deposits also rose by 24.95% from ₦3.57 trillion in Q1 2019 to ₦4.46 trillion at the end of Q1 2020.
Though the bank maintains its strong performance in the period, it remains unable to meet the 65% regulatory benchmark for the Loan to deposit ratio (LDR) fixed by the Central Bank.
“With our blended target price of ₦31.26, we maintain a BUY recommendation at the current price, as the stock trades at a discount of our estimated fair value”, analysts at Greenwich concluded.
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Zenith Bank: equity analysts maintain strong Buy rating on excellent balance sheet
