Zenith Bank: Equity analysts upgrade estimates as lender’s earnings arouse sentiment
Zenith Bank Plc. raked in profit too strong for envious corporate titans to benchmark in 2019.
Now, the die is cast; the financial service supermarket has crossed the Rubicon as the group earned N6.60 on every share outstanding in 2019.
Traded at N18.50 per share, the group closed last week with market capitalisation of N580.835 billion on 31,396,493, 786 shares outstanding.
Despite the cutthroat profit for the year, the group share price plunged, having peaked at 19.85 in the last 7-trading sessions.
The Tier-1 bank has set new pace for future profitability on account of improved equity based, aggressive credits and deposits mobilization plus increase interest in retail segment.
Analysts at FBNQuest however predicted a moderate growth in loan book for 2020 as the bank hit the apex bank loans to deposit rate benchmark.
Low yields assets adjusted
While the group adjusted to low yield from investment in securities with portfolio reshuffle, it booked more loans across sectors that align with the corporate risk appetite.
Analysts held that the new record would be yardstick for assessing the performance of Tier-1 capital banks going forward.
For the first time in the history of Nigerian banking, Zenith, a leading financial service profitability didn’t just hit N200 billion marks; it came stronger.
Despite harsh business operating environment, Zenith Bank hits profit point it has never reached in its 29 years of existence in 2019.
In less than a year after Ebenezer Onyeagwu took over the mantle at the Zenith as the group managing director and Chief Executive Officer, the group has boost shareholders fund by about 16%.
Known to be well capitalised and adequately financed bank with strong footprint in corporate segment, the bank has recently started to eye the retail end.
“And it is doing well; with strong expectation to onboard more retail clients”, analysts covering the bank said.
At the time when the Nigeria’s economy expanded 2.27% year on year, Zenith bank did more than double as it grew gross revenue by 5%.
“Zenith did twice the level of the economic growth rate is an acceptable trend giving the fact that after government, Banks are the highest spender in the economy”, Consultants at LSintelligence said in an email.
Where did the profit come from?
The group gross earnings expanded to N662.3 billion compare to N630.3 billion. The increase represent 5% surge when compare with the 2018 revenue.
But income from income earned from interest yielding assets portfolio backed down, culminating from reduced investment securities where the group had played strongly up till early 2019.
The audited result shows that the group interest income slowed down by 5.6%, from N4.15.6 billion compare with N440.1 billion the group earned in 2018.
Then, demand on funds used to fund interest earnings asset increased year on year. Though, overall cost of funds stayed at 3% which is one of the least in the banking sector.
Specifically on funding mix, interest expenses expanded 2.8% year on year from N144.5 billion in 2018 to N148.5 billion in 2019.
What this means is that Zenith Plc expended about N37 on every N100 earned from its portfolio of interest earning assets in 2019.
This is a bit higher when compare with about N33 expended in the comparable period.
Analysts Coronation Merchant Bank led by Guy Czartoryski said compression in net interest income in Q4 showed a rigid asset/liabilities structure in the face of sharp decline in interest rates.
“We think the bank can make improvements to interest expenses going forward”, Coronation stated
Analysis of interest earnings assets shows that total loan and advances significantly expanded by 20.6% year on year.
In 2019, Zenith Plc has total loan of N3.012 trillion as against N2.497 trillion recorded in the corresponding year in 2018.
Analysts are of the view that the push in loan book was connected to the Central Bank of Nigeria’s directive to banks to channel credit to the real sector of the economy last year.
Though, Zenith group was expected to convert 65% of its aggregate deposits to loans and advance, the group however achieved 70.7% target.
In 2019, its total deposits settled at N4.262 trillion having expanded by 15.5% year on year from N3.690 trillion in 2018.
What this means is that, lending rates were reduced in order meet the target which was also due to lower yield environment.
Increased loan book did not translate to bloated interest income per se, just at the same time when investment in securities return lower compare with previous year.
As result of increased loan book, the group booked higher impairment on credit losses for 2019 as shown in its audited statement.
Impairment credit increased by 30% from N18.4 billion in 2018 to N24 billion at the end of financial year 2019.
Despite the sharp increase loan book and associated impairment credit booked in the year, non-performing loan at the group level trend downward to 4.3% in 2019. This was 70 basis points below the 5% recorded in 2018.
What then support the profit?
Zenith Bank Plc sterling performance was largely driven by the rise in non-interest income by 28.98% from N179.96 billion to N232.12 billion in 2019.
While average inflation rate for 2019 was 11.4%, Zenith bank reported that its operating expenses surged 2.8% year on year.
The financial statement shows that the group operating expenses jerked up from N225.5 billion to N231.8 billion.
With this, profit before tax only rose 5% year on year from N231.7 billion in 2018 to N243.3 billion a year after.
When compare with 2018, there was a 10% reduction in tax liabilities which did impact the bottom line strongly.
At the increase rate of 8%, Zenith group profit after tax hit N208.8 billion in the audited financial statement for 2019 as against N193.4 billion in the corresponding year in 2018.
Zenith Bank Plc reported an increase in net margin from 30.7% to 31.5% in 2019.
This means that lender earned 31.5% spread on its businesses compare with 30.7% in the corresponding year in 2018.
The improvement came on the back of its ability to reduce cost, just as deposit repricing had positively impacted funding cost.
Banks generally reduced, perhaps offloaded expensive terms deposits with cheaper alternatives.
Cost as proportion of income generated by Zenith sloped downward in 2019.
The audited financial statement shows that Zenith CIR pitched at 45.1% as against 46.4% in the comparable period in 2018.
This widened its profit margin as the group expenses per income slipped.
Strong capital backed by shareholders contribution
Analysts at Coronation believe that the bank remains in the strong capital position.
Its capital adequacy ratio which berthed at 22% in 2019 was stronger than 16% required for international banking license.
In the year, Zenith group raised its shareholders fund by more than 15% from N815.8 billion in 2018 to N941.9 billion.
Return on assets of 3.4% and return on equity of 23.8% for the financial year 2019 as audited are well in excess of industry benchmark for Nigerian banks, analysts stated.
Still Broadstreet dividend king
In the banking sector, Zenith Bank is rated among the leading dividend kings at the Broadstreet. It has paid consistently and maintained strong payout ratio suitable for its investors’ profiles.
The Board of Directors proposed a final dividend of N2.50 per share which in addition to the N0.30 per share paid as interim dividend amounts to N2.80 per share.
Financial position: Strong as ever
Zenith Bank Plc raised its balance sheet size by 6.6% from N5.955 trillion to N6.346 trillion in 2019. The group grew the balance sheet despite massive repayment of borrowed funds.
Total borrowing sloped downward significantly from N1.191 trillion in 2018 to N754.4 billion at the end of financial year 2019.
This translates to about 37% reduction in leverage position year on year. Then, its total liabilities surged 5.5% with significant push coming from aggressive deposits mobilization in 2019.
So, analysts at FBNQuest maintained outperform rating on Zenith Bank and increased price target by 17% to N47.70.
This implying a potential upside of 150% from current levels. Accordingly, FBNQuest analysts raised earnings per share (EPS) estimate by about 16%.
The upgrade to our 2020E earnings forecast is underpinned by a 19% upward revision to our 2020E non-interest income forecast, FBNQuest stated.
Given the subdued interest rate environment, management sees a 20bp year on year reduction in NIMs to 8.0%.
“Despite the lower NIMs, we expect funding income to be flat, largely because of the strong volume growth over the last two quarters”, FBNQuest research held.
Analysts at Greenwich also recommended BUY even at the point when the market price was N19.85, believing the stock traded at a discount of 84.93% to its estimated value – N36.71 kobo.
Zenith Bank: Equity analysts upgrade estimates as lender’s earnings arouse sentiment