Zenith Bank: Reduced Loan Exposure, Amidst Rising NPL Ratio

UBA: Stronger Earnings Capacity To Support Price, Dividend
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Coy: Zenith Bank Plc
Rating: Buy
Current Market Price:
Year High: N34.20
Year Low: N19.60
Fair Value: N40.89
By: Jeariogbe Tunde Segun (Equity Analyst)

Key Financial Ratios
• Interim Dividend for the period is 30 kobo, up from the previous 25 kobo paid in the corresponding period of 2017.
• Payout Ratio is therefore same as 11.52% (H1-2017: 10.42%)
• Sustainable Growth rate is currently estimated at 10.05%
• Non-Performing Loan ratio in the review period was 5.51%, compared to the 3.28% posted in the 2017 full year financial performance, indicating the need to watch its asset quality.
• The five-year average Dividend Yield of Zenith Bank Plc has been estimated at 10%, above the industry average of 2.21%
• Similarly, the five-year dividend growth rate is currently estimated at 11.03%, lower than the estimated industry average of 25.77%
• Five-year average effective tax rate is currently estimated at 15.11%

Company Figures
• Gross Earnings for the half-year 2018 came 15.31% below that of the corresponding period of 2017. Please note that N322.201 billion was reported as Gross Earnings from the previous N380.440 billion.
• 23.19% same as N74.709 billion of the Gross Earnings was reported as Interest Expense for the period as against N123.29 billion same as 32.41% that was reported last H1 financials
• Nevertheless, Profit before Tax (PBT) reported for the period was N107.35 billion, which is 16.46% above the N92.18 billion achieved in the corresponding period of 2018.
• Profit after Tax (PAT) equally came higher than that of last year by 8.52%, moving from N75.317 billion to N81.737 billion
• Total Assets reported for the period stood at N5,256.46 billion compared to the N4,927.36 billion in 2017.
• Total Liabilities stood 7.82% above same quarter in 2017.
• Total deposits from customers for the six months was estimated at N3,165.95 billion, a marginal growth of 6.42% above the N2,972.93 billion reported in 2017.
• Perhaps due to the bank’s conservative approach, the amount offered in Loans and Advances reduced by 14.36%, when compared with the reported value in 2017.
• Due to marginal difference between the Total Assets and Total Liabilities for the two periods compared in this report, Net Assets estimated for the reported period only inched above that of the similar quarter of 2017 by 2%.
• See table below for details:

Volatility Ratios
• Although the estimated beta value for Zenith Bank shares stood fairly below the industry average, but well above the Market Beta. This signifies its liquidity and patronage by the investing public
• Although almost irrelevant, since we analyze a financial institution whose major business is to collect deposit (mostly reported under liability), we estimate Debt/Equity ratio as 106.74% well above the industry average of 25.30%


Profitability Ratios
• Interest Expense to Gross Earnings is presently estimated at 23.19%, which is 28.45% lower than the 32.41% estimated in the 2017 half year.
• PBT margin stood at 33.32% as against 24.23% last year, this is a 37.51% improvement.
• Similarly, Profit margin looked up against last year’s figure. We have estimated a 25.37% margin from Gross Earnings as against the previous estimate of 19.89%
• Return on Average Equity is now 11.36%, compared to the 10.47% returns achieved in the first six months of 2017.
• Return on Average Assets only differs marginally by 1.73%, moving from 1.53% to 1.55%.

Efficiency Ratio
• Gross Earnings to Total Assets ratio is estimated at 6.13%, which is 20.61% lower than the 2017 estimate.
• Similarly, Gross Earnings to Equity is now 44.78% as against the 52.89% estimated in the 2017 half-year statistics.
• Financial Leverage is 7.31x as against 6.85x, this is an estimate of the number of times the Total Assets replicates the Equity. In other words, the ratio got better.
• It was also established that 59.17% of the Total Deposit went to customers in the form of Loan and Advances during the period under estimate, 19.53% lower than the 75.53% given out during the first six months of 2017
• Meanwhile, Loan and Advances is same as 35.64% of the Total Assets this is 19.72% lower than the 44.39% of last half year. This shows a controlled/reduced risk compared to 2017.


Investment Ratios
• Just as in the company report above, since share outstanding remained constant during the two periods under consideration, the estimated amount earned per unit of Zenith Bank shares is N2.60, 8.52% better than the N2.40 of prior half-year.
• Due to Foreign currency translation differences for foreign operations, the Total Comprehensive Income per share for the period is N2.64 as against N2.24 last half year, this is 17.74% difference.
• P/E Ratio for the period is 2.30x as against 2.50x estimated last year.
• The Book Value of Zenith Bank is N22.92 fairly same as N22.91 last year. Please note that this almost same as the current market price of Zenith Bank shares (N20.05). Kindly understand the difference between the price when this result was released and when the analysis is being done
• OpEx Margin was controlled against the similar quarter of 2017 as the ratio adjust from the 32.41% to 23.19%.

Valuation
Our attempt to place a fair value on Zenith Bank took us through several valuation methods after which we settled for the constant perpetual dividend growth rate. We do not expect galloping growth in dividend, since this has experienced appreciable growth in few years prior, so we make use of 2.758% as our growth rate. To arrive at this value, we estimated five years dividend growth rate at 11.03%, and we make use of the average. It was also assumed that the final dividend will be around N2.50, and discounted at 10%. On this strength, we have placed a fair value of N40.89 per share.

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