ZENITH BANK RESILIENT PROFITTO DRIVE PRICE AMIDST HEADWINDS

Zenith Bank's management has demonstrated consistency in creating value for stakeholders as its interim dividend policy that started last year is gradually coming to stay, helped once more by half year numbers supporting payment.

This is just as it continues to meet the Nigerian Stock Exchange's post listing requirement, thereby boosting its corporate governance status, as report were made available ahead of deadline to the investing community and earlier  than in the corresponding period of 2015.

The bank's multi-year track record of outstanding profit level in its industry has continued, despite setback recorded in the recent financials, because it did not factor in the revaluation gain from the over 40% Naira devaluation. 

Its half year result for the period ended June 30, 2016 were mixed as revealed by the profitability and efficiency ratios.

In absolute numbers, Gross Earnings remained robust, despite the slight decline of 6.2% fromN229.08 billion in 2015 to N214.81 billion, while the slide in bottom line Double digit at 15.7% to N44.84 billion, from N53.18 billion in the corresponding period of 2015.

The bigger drop in net profit resulted from its cost of operation as reflected in the profit margin for the period which fell by 10.20%, with impairment charge for credit losses increasing by a significant 97.64% and tax for the period reducing by 3.05% to N14.23 billion  and N18.44 billion respectively. Net assets jumped to N620.74 billion from N546.39 billion last year. 

Consequently, Earnings Per Share for the period went south to 143 kobo from 169 kobo in 2015, representing a 15.7% decline and was a replica of the price in 10.92x, which is marginally higher than the 9.40x recorded last year. The second quarter book value for the period stood at N19.77.

The drop in top line and profit margin is a reflection of macroeconomic challenges and compared to last year’s, it is evidence of increasing provision for bad loans. 

This follows the bank, like others, adopted the new Central Bank of Nigeria (CBN) guideline on making provisions to clear its balance sheet instead of waiting until the December year-end. The new guideline of CBN on provisions, makes it compulsory to provide even for performing loans. This was why Zenith Bank’s coverage ratio increased to 110% in its half year financials from 97% full year of 2015. Notwithstanding this however, capital adequacy and  liquidity ratio have remained above the regulatory requirement to solidify the bank's fundamentals and reveal its proficient risk management framework that has helped to keep its Non-Performing to Total Loans ratio low at 2.3% in the industry.

AUDITED HALF YEAR
COY	2015	2016
	(N)	(N)	% Chg
Date Released	August 13, 2015	August 11, 2016
Price as@ Released Date	15.93	15.60	-2.07
Gross Earnings	229,082,000,000	214,812,000,000	-6.23
Profit After Tax	53,180,000,000	44.843,000,000	-15.7
Shareholders' Fund	546,386,000,000	620,739,000,000	13.61
ESTIMATED RATIOS
Earnings Per Share	1.69	1.43	-15.4
PE Ratio	9.40	10.92	16.17
Earnings Yield	10.63	9.16'	-13.8
Book Value	17.40	19.77	13.62
ROE (%)	10	7.00	-30.0
Dividend( Interim )	0.25	0.25
Profit Margin	23.21	20.87	-10.2
Year End	Dec	Dec

 Source: NSE, Company Report and Investdata Research 

This proactive risk management that factors in the new provisions model of CBN, in spite of which the bank still posted strong numbers for the period under review without booking in the revaluation gains for that period is good for investors. It is an indication of a better end of the year for shareholders.

Share Holding Structure
Jim Ovia	9.38%
Stanbic Nominees Nig. Ltd	16.28%
Nigerian Citizens & Associations	74.34%
Other Statistics
Shares Outstanding (MN)	31,396,493,786
Opening Price (2015)	N18.41
Closing Price  2015	N14.05
Closing Price as at Sept.9, 2016	N14.60
Date Listed	21/10/2004
Year End	31st Dec.

The bank's management team has maintained efforts in building a world-class bank in all ramifications to ensure steady growth in terms of profitability and dividend payout.
The post meltdown crisis and reforms in the industry has solidified its operations and branch networking with the aid of ICT that had been the supporting game changer, helping the bank remain top in the sector. The bank’s immense effort was clearly revealed in the released financials over the past Four years. Activities were boosted as all figures were green and tall in the comparable period. 

Investors, on the other hand, have not been blind to the outstanding performances hitting the market from Zenith Bank as they took strategic positions which continue to reveal value in the bank stock. Similarly, the Book Value has grown in the same direction to N18.93 from N14.75 each in 2012. Investor confidence complimented its price as valuation tools placed the bank's stock at N26.

ZENITH BANK FOUR YEARS FINANCIAL PERFORMANCE
	2012	2013	2014	2015
Date Released	April 04 , 2013	March 11, 2014	March 05, 2015	March 15, 2016
Price @ Released Date	21.65	21.40	19.00	13.30
Gross Earnings	307,082,000,000	351,470,000,000	403,536,000,000	432,343,000,000
Profit After Tax	100,681,000,000	95,318,000,000	99,455,000,000	105,663,000,000
Shareholders' Fund	462,956,000,000	509,251,000,000	552,638,000,000	594,353,000,000
Dividend	1.60	1.75	1.75	1.80

Source: NSE, Company Report and Investdata Research

Zenith Bank Performance

A critical look at the bank’s performance for the last four years showed that the bank has steadily enhanced its performance as reflected in its profitability ratios within the period under review. Its gross income during the period grew by 40.80% from N307.08 billion in 2012 to N432.34 billion while profit after tax (PAT) rose by 5% to N105.66 billion from N100.68 billion posted in 2012. The bank in the last four years has posted stronger numbers that supported its share price. The profitability level were down 2013 to hit N95.31 billion and rebounded in 2014 and 2015, making it the first Nigerian bank to record the N105 billion profit mark. It also ranks among the top three banks in asset, profit margin, service delivery and risk management in its industry today.  Within this period, the risk and cost management of the bank had improved tremendously leading to enhanced value creation to shareholders and other stakeholders alike. The nature and complexity of the risks in its business requires strong and robust risk management structure to provide adequate oversight at all levels. The earnings power of the bank remained strong at 321 kobo per share, regardless of the period it fluctuated to reflect the over-regulation of the Nigerian banking industry and the broader economic situation till date. This has manifested over time in high benchmark MPR, tight liquidity, falling crude oil price, dwindling external reserve and falling Naira value against major international currencies.

In 2013 the bank posted a lower earnings per share of 304 kobo before turning up to317 kobo in 2014 and 337 kobo in 2015, regardless of its industry headwinds during the years. Zenith Bank's 2015 full year earnings per share of N3.37 beats analysts and market expectations that non-performing loan resulting from the falling oil price would have impacted negatively on the banks profitability. The bank’s total assets per share and book value per share stood at N122.88 and N18.93 respectively.

ZENITH BANK- ESTIMATED RATIOS
	2012	2013	2014	2015
Earnings Per Share	3.21	3.04	3.17	3.37
PE Ratio	6.75	7.05	6.00	3.95
Earnings Yield (%)	14.81	14.19	16.67	25.30
Book Value	14.75	16.22	17.60	18.93
ROE (%)	22.00	19.00	18.00	17.78
Profit Margin (%)	32.79	27.12	24.66	24.43
Year End	Dec	Dec	Dec	Dec

Source: NSE, Company Report and Investdata Research Valuation

Zenith Bank current share price is considered very attractive at 5.46x earnings. Its 2015 financial year result upgraded guidance are indicative of strong performance that continues to deliver on expectations. Meanwhile, the Book Value reveals an underpriced situation as it trades below N19.77. All this considered, each unit of Zenith Bank is fairly priced at N26.

Analysts Opinion/Recommendations

Since the beginning of 2016, the bank's share price has oscillated to reflect the general market direction and trend.  With the numbers reported in this interim results, the bank's full year EPS is projected to be in the region of 300 kobo. As summarized in the table above, Zenith Bank delivered a solid performance as retained  earnings grew from N40.35 billion to N45.48 billion, representing 13% increase, just as net income  rose  by 12% to N53.18 billion. The year-on-year change in EPS was commensurate with net earnings. The stock looks good for traders and investors, especially from the low price of N18 from where it is expected to grow and breakout first tradable resistance and support level at N14.93. 

The shares of Zenith is undervalued with focus on our FY 2016 estimates and currently trading at a 40% discount to our fair value estimate of N26. We are mildly optimistic that despite the tight operating environment in Nigeria with the implementation of the Treasury Single Account policy of the Federal Government which tightened the liquidity condition in the nation's financial system, Zenith Bank has the capacity to weather the storm. This confidence also despite the steep tank in oil prices which continues to pose a major threat to asset quality for most Nigerian banks as a result of their exposure to the sector and the tight currency control policies of the CBN that has weakened the earnings capacity of banks in the country.

Although we see the impact of the major headwinds on  the bank's first half of 2016 performance, it is our opinion that the decline in share price will adequately compensate for any unexpected down side risks.

We are also impressed with the steady rise in the company’s book value position over the past few years, even as we  expect the bank's management to be proactive with the growth in its Return On Equity. 

We have a BUY recommendation on the shares of Zenith Bank. 

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Ambrose Omordion
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