Zenith Bank: Strong fundamental, capital buffer attract analysts
Analysts, investors are cheery about Zenith despite its not too impressive first half of the financial year 2019 performance. However, analysts estimates show that the bank still standing strong, especially with a strong capital structure currently above peers in the industry.
Zenith Bank is notable for impressive financial results in the Nigerian banking industry and the audited report for the first half of 2019 is no exception. Gross earnings increased modestly by 2.91% to N331.59 billion as against N322.20 billion in the first half of 2018 due to higher non-interest income analysts at PAC Capital said.
The bank’s pretax profit hit N111.68 billion, having expanded at 2.08% from N109.6 billion. Then, Profit after tax increased 5.83%, closed the first half at N88.88 billion, from N81.737 billion in the comparable period in 2018 aided by lower tax provision.
The uptick in the bottom line came on the back of a solid 24% growth in non-interest income as income from interest-earning assets receded.
So, operating profit grew marginally by 1%. For the period, the increased profit after tax resulted in earnings per share (EPS) of N2.83k as against N2.60k in the comparable period in 2018.
Interest income went down by 6.15% from N228.67 billion to N214.60 billion in the first half of 2019. Analysts said this was owing to the decrease in yields on interest-bearing assets as well as the declining assets base.
This was primarily on the back of a decline in the yield on money market instruments and a drop in the average interest rate on loans and advances.
While there was a surge in investment securities, loan books declined by 3% from N2.01 trillion to N1.95 trillion on the back of management aversion to risky assets which resulted in a steep decline of 21% in interest income on loans and advances.
However, the bank reported impressive figures for interest income from treasury bills, promissory notes, government & other bonds and placement with banks & discount houses during the period under review.
WSTC Securities stated that revenue from other interest-bearing assets (treasury bills, government and other bonds among others) rose for the period, it was not enough to offset the decline in risky income due to the declining yield on risk-free securities.
On the bright side, interest expense declined by 4% from N74.71 billion to N72.09 billion. This was primarily on account of a 4%, 8% and 6% decline in interest on current accounts, time deposits and borrowed funds, respectively.
The decrease in interest expense further reinforces management drive towards the cost of funds optimization, which declined by 40 basis points to 3%, the steeper decline in interest income eroded these gains, analysts at WSTC reckoned.
Consequently, net interest margin declined by 150bps to 9% and net interest income shrunk by 7% from N153.96 billion to N142.52 billion.
In the period, non-interest income grew by 24% from N88.60 billion to N109.73 billion, underpinning the income diversification effort of the group. The robust growth was informed mainly by fees on electronic products, which grew by 169% as the group continues to consolidate on its electronic platforms to drive retail business.
Also, Credit-related fees and account management fees also increased by 44% and 9%, respectively. On the strength of the robust growth in non-interest income and muted increase of 1% in total operating expense, PBT grew from N107.36 billion to N111.68 billion in the first half of 2019.
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In addition, higher trading gains also contributed to the improved non-interest income as it increased by 22.53% to N45.10 billion as against N36.81 billion in the first half of 2018, due to lower loss on derivatives.
“We have a revised forward EPS of N6.41k and a fair value estimate of N29.83k. At the current market price of N18.60k, the stock is trading at a discount of 60% to our fair value estimate. Thus, we uphold our BUY recommendation”, WSTC stated.
There is an improvement in the bank’s effort towards cost optimisation as operating expenses increased marginally by 1.08% to N126.83 billion in the first half of 2019, from N125.48 billion reported in the first half of 2018.
The slight increase in operating expenses was attributed to higher personnel expenses and higher depreciation of property and equipment during the period.
Personnel expenses and depreciation of property & equipment increased by 11.25% and 22.89% to N38.73 billion compare to N34.81 billion and N9.79 billion compared to N7.97 billion in the first half of 2019 respectively.
Consequently, the cost-to-income ratio improved to 53.20% in the first half of 2019 as against 53.90% reported in the first half of 2018.
Due to higher than expected credit losses on loans and advances, impairment charges rose by 41.31% to N13.74 billion in the first half of financial 2019 as against N9.72 billion in 2018.
The benefit derived from a lower cost of funds and higher non-interest income offset the lower interest income and a higher impairment charge on profitability during the period.
The balance sheet of the bank remains strong and solid in the first half of 2018. This is evident in the robust liquidity ratio and capital adequacy ratio.
The liquidity and Capital Adequacy Ratio (CAR) of the bank are well above industry requirements of 30% for liquidity ratio and 15% for capital adequacy ratio.
The liquidity ratio remained at 74.60% compare to 77.70% while the capital adequacy ratio improved to 25% compared to 21%.
As a result of higher securities portfolio and interbank placements, total assets increased by 12.22% to N5.90 trillion in the first half. However, total liabilities rose just in line by 11.95% to N5.08 trillion compared to N4.54 trillion in the corresponding period of the previous year due to higher customers deposits.
Consequently, net assets increased by 13.90% to N819.51 billion as against N719.51 billion in 2018 and this translated to a net asset per share of N26.10 compare to N22.92. In line with our expectations, the bank rewarded the shareholders with an interim dividend payment of N0.30 per share in the first half of 2019.
PAC Capital put the target price of the stock at N31.75, representing an increase of 71.63% from the current price of N18.50. Consequently, we maintain a BUY recommendation on the stock of the company.
Meanwhile, FSDH Research also listed Zenith as one of the stocks to watch.
Zenith Bank: Strong fundamental, capital buffer attract analysts
