AGAIN, ZENITH BANK BEATS EXPECTATION ON STRONG EARNINGS POWER

Zenith Bank, on Friday, released its half-year audited result, which once again demonstratedits high level of  corporate governance byconsistently making its numbers available to the investing community earlier than the 2016 numbers to enable investors plan their investment, while equally keeping to the post-listing obligation of the Nigerian Stock Exchange (NSE).

The bankhas consistently grown its quarterly and yearly earnings over a decade in its bid to create value for stakeholders with a dividend policy of growth to reward investors. In the last three years, it has regularly paid interim dividend supported by the growth in profit over the period. It had declared an interim dividend of 25 kobo in line with market expectations, despite the growth in Interest Expense, Impairment Charge and Operating expenses that weighed down its earnings.

The bank’s profitability for the period were boosted by growth in fee and commission income on the back its bouquet of electronic products, collection services and mainly foreign exchange trading Income and, to a smaller extent, Treasury Bills' trading income. This suggest that the improvement in FX liquidity brought about by Central Bank of Nigeria’s intervention may have accounted for the growth in the FX income line, given that most of the gains were earned in Q2.

Its half year position after huge provision for bad loans shows the solid state of the bank with profitability and investment ratios looking up, pointers to what should be expected at the end of the current financial year. The loan loss provision increased by 198% to N42.4bn, from N14.23bn in 2016, while Cost of Risk (CoR) increased significantly to 3.6%, compared to our 1.5% estimate for FY 2016.  The management would likely provide answer to this at the conference call with investors soon. It may however not be unconnected with its exposure to domestic operators in the oil and gas companies like Seplat, as well as telecommunications operator- Etisalat. We expect that this will boost the bank's bottom line when recovered, helped by Nigeria's improving economic fundamentals, declining inflation rate and expected increase in oil demand which will help in enhance loan recovery.

In absolute numbers, Zenith Bank posted robust 77.1% increase in Gross EarningstoN380.44bn, from N214.81bn in the corresponding half-year of 2016. Profit after tax growth was even more significant, soaring by 112.4% to N75.32bn, from the restated 2016 profit position of  N35.47 billion.

Despite the high operational cost and impairment charge for credit losses, the profit margin remained above 15% international standard at 19.30% for Q2. Net assets jumped to N703.50 billion from N620.74 billion last year. Consequently, Earnings Per Share for the period went north to 240 kobo from 113 kobo in 2016, representing a 112.39% growth and was a replica of the price in 2.50x, which lower than the 3.54x recorded last year. The second quarter book value for the period stood at N22.91.

Operating Expenses grew significantly, up 33% y/y. A higher growth in total operating Income however brought about by significant growth in FX income, resulted in a reduction in Cost to Income ratio which fell to 47.7% relative to 57.5% in H1 2016.Overall, PBT was 71% higherto N92.18 billion from N53.91 billion in 2016. The bank’s annualised Return on Equity (ROE) of 21.2% compares with our estimate of 18.40% for FY 2016

AUDITED HALF YEAR
COY	2016	2017
	(N)	(N)	% Chg
Date Released	August 11, 2016	August 10, 2017
Price as@ Released Date	15.60	24.00	53.84
Gross Earnings	214,812,000,000	380,440,000,000	77.1
Profit After Tax	35,467,000,000	75,317,000,000	112.4
Shareholders' Fund	620,739,000,000	719,333,000,000	15.88
ESTIMATED RATIOS
Earnings Per Share	1.13	2.40	112.4
PE Ratio	3.54	2.50	16.17
Earnings Yield	7.06'	10.00	-13.8
Book Value	19.77	22.91	13.62
Price To Book Value	1.24	0.95	-23.39
ROE (%)	5.71	10.47	-30.0
Dividend( Interim )	0.25	0.25
Profit Margin	16.51	19.80	19.93
Year End	Dec	Dec

 Source: NSE, Company Report and Investdata Research

Valuation

We are optimistic about the bank’s performance in the rest of the year and expect earnings from the corporate and Investment Banking business to continue to support profit.  Consequently, we project an EPS of N5.20 for full year and a final dividend of N1.95. Thus,Zenith Bank is fairly priced at N32, with a trailing P/E: 3.10x and Q2 price to book value of 0.95.   Investors with medium and long-term goal, who desire to preserve capital, should look the way of this stock. Its Q2 result had confirmed our earlier upgraded guidance after studying the first quarter scorecards that indicative of strong performance that continues to deliver on expectations. As the bank’s Book Value reveal a fair value situation at it trades slightly above its book value of N22.91. On dividend equalization policy of the bank with growth in payout, we expect a much higher dividend at the end of the year and put a Buy rating on Zenith Bank despite the profit taking after the release of impressive numbers as many traders had factored in 25 kobo dividend before it announced.

Technical View

The bank’s price action for one year has formed a symmetrical triangle that supports continuation or reversal of the current trend; it is trending up within the triangle on a positive sentiment for Q1 impressive numbers. RSI is reading 50.63 and money flow index is looking up to signal that funds are still entering the bank. 

The bank’s price action for two years had formed a bullish chart pattern called invert head and shoulder that supports continuation of uptrend, meaning that reversal of the current pullback is imminent, it is trending ability above ADX of 20 at 48.  RSI is reading 66.28 and money flow index is looking DOWN to signal that funds are leaving.  

ZENITH INT'L PLC
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 (2017)	N14.75
Closing Price at August 11, 2017	N23.74
Date Listed	21/10/2004
Year End	31st Dec.

Source: NSE, Company Report and Investdata Research

The bank’s conservative nature and prudence is paying off in its efforts to build a world-class bank with steady growth in terms of profitability, dividend payout and impacting the economy through its social responsibilities. Also, the bank has demonstrated its doggedness at all levels of operations that have continually supported and driven profit to keep it among the top banks in Africa and in Nigerian, in terms of market capitalisation, earnings, deposit, total assets and net assets.  The bank’s branch networks within and outside the country with professionalism in service delivery at all level have shown in the released financials for the last Four years. Its innovations through the bank ICT platforms have   contributed to making all the figures in green. Investors, on the other hand, have equally followed the outstanding performances of the bank over time, taking strategic positions which continue to reveal value in the bank’s stock in creating wealth as investors smile to the banks on biannual bases.

Similarly, over the years, its Book Value has grown in the same direction from N16.22 in 2013 to N22.44, investor confidence supported its price as valuation tools placed the bank's stock at N30.

ZENITH BANK FOUR YEARS FINANCIAL PERFORMANCE
	2013	2014	2015	2016
Date Released	March 11, 2014	March 05, 2015	March 15, 2016	Feb 27, 2017
Price @ Released Date	21.40	19.00	13.30	14.73
Gross Earnings	351,470,000,000	403,536,000,000	432,343,000,000	507,997,000,000
Profit After Tax	95,318,000,000	99,455,000,000	105,663,000,000	129,652,000,000
Shareholders' Fund	509,251,000,000	552,638,000,000	594,353,000,000	704,465,000,000
Dividend	1.75	1.75	1.80	2.02

Zenith Bank Performance (2013-2016)

Looking at the bank’s performance in the past four years as revealed by the numbers in the table above and below, the figures showed that the bank has consistently, during the period under review, heightened its performance as reflected in its profitability and investment ratios for the period.

Its gross income during the period grew by 44.54% from N351.47bn in 2013 to N507bn, while the earnings power rose by 36.02% to N129.65bn from N95.32bn posted in 2013. Zenith Bank’s performance within the period has supported its share price. Profitability level has remained in an uptrend direction as surprises continue to hit the market, being the first Nigerian bank to record N100bn profit mark. It also ranked number one in net assets and among the top two in terms of profit margin, service delivery and risk management in its industry today. 

Within this period, the risk and cost management of the bank have improved tremendously, leading to enhanced value creation to all its shareholders and other stakeholders. The nature and complexity of the risks in its business requires strong and robust risk management structure to provide adequate oversight at all levels. Earnings per share remained strong and steady at 415 kobo regardless of over regulation in the industry and the unfriendly economic situation till date with high Monetary Policy Rate (MPR), tight liquidity, ascending inflation rate, dwindling discretionary income and falling naira value at the exchange market. 

The EPS rose from 304 kobo in 2013 to 317 kobo in the following year which was sustained in 2015 and 2016, despite the industry headwinds during the years. 

As we have mentioned earlier in this piece, the bank’s 2016 full-year EPS of N4.13 beat analysts and market expectations as rating agencies continued to downgrade Nigerian banks due to the inherent countryrisk , as a result of contraction in the economy. The improvement in bank’s Earnings Yield from 14.19% in 2013 to 28.03% attests to its quarterly and yearly earnings growth.

ZENITH BANK- ESTIMATED RATIOS
	2013	2014	2015	2016
Earnings Per Share	3.04	3.17	3.37	4.13
PE Ratio	7.05	6.00	3.95	3.57
Earnings Yield (%)	14.19	16.67	25.30	28.03
Book Value	16.22	17.60	18.93	22.44
ROE (%)	19.00	18.00	17.78	18.40
Profit Margin (%)	27.12	24.66	24.43	25.52
Year End	Dec	Dec	Dec	Dec