Zenith Bank 2020Q1: Strong Balance Sheet, Diversified Income Lines

Zenith Bank Plc, last week presented its financials for the first quarter ended March 31, 2020, to the Nigerian Stock Exchange (NSE) slightly later than the date of the 2019 numbers, although it came within the regulatory time frame.
The numbers confirmed the bank’s resilience, maintaining the growth trend of its quarterly earnings over the years, the result of its diversified income lines, and aggressive retail banking business, driven by technology as demonstrated by the recent launch of voice banking, technology to make banking easy while driving deposits.

The bank reported an aggressive 44.13% growth in its loan book in the period, making it perhaps the highest rate in the review period. This move may not be unconnected with management’s desire to meet the regulatory minimum Loan-to-Deposit Ratio of 65%, even as it will test the bank’s risk management capabilities that will become evident in the coming months. At the moment, the Nigerian banking industry is exposed to the twin crisis of oil price crash, at a time of challenges in the economy which has exposed it, just like its peers, to a high risk of bad loans.

It is noteworthy that Zenith Bank’s management has kept its ratio of non-performing loans to total loan size below the 5% threshold. We note the need for management to continue keeping the numbers in check at this time when NPL ratio climb up by 30 points to 4.6% at the end of the 2020Q1, considering the gloomy global and domestic economy that signaled a high possibility of many loans going bad. That notwithstanding, we note the growth in the bank’s customer deposit as well as loans and advances, which are signs that the management is proactive in its determination to create value for all stakeholders.

Gross earnings for the period grew mildly by 5.5% to N166.81bn, from N168.11bn in the corresponding period of 2019, driven by non-interest revenue, especially trading income, as well as forex revaluation gains. Profit was almost flat at N50.53bn, compared to N50.23bn, translating to 161 kobo earnings per share from its previous 160 kobo,
The drop in the bank’s market value for the period reflected on the earnings yield, which rose to 10.84% as of released date, from 7.66% in 2019.
Although operating expenses rose by 10.1%, we observed the improvement in operating efficiency with a cost-to-income ratio relatively flat at 51.0%, as reflected in the profit margin ratio of 30.29% in the period, from 31.77%. This was despite the high provisions for bad loans, which increased by 88.5%, significantly impacting the bottom-line.

Net asset improved by 18.58% to N925.94bn, from N780.89bn in 2019; just as the three-month trailing Price-to-Earnings ratio for the period stood at 2.31x, lower than the 3.27x recorded in 2019.
Book Value for the quarter stood at N29.49 per share, while return on equity slipped to 5.46%, from 6.43% in 2019.
Furthermore, liquidity and capital adequacy ratios remain above regulatory thresholds of 41.9% and 19.6% respectively.

The bank’s corporate and retail banking segment has continued to support earnings capacity as reflected in investment and profit ratios, which actually reveal its high margin of safety at princely 98.59%, considering the market price as of when the result was released. The 28.79% growth in retained earnings to N374.03bn, from N290.41bn in 2019 boosted Net Assets and balance sheet for the period, just as the flat cost-to-income ratio at 51x and consistent growth in its net assets are encouraging. These are expected to support the share price going forward.

Valuation
The consistent growth in earnings on a quarterly basis (irrespective of the mild increases in current scorecard), has reduced the waiting period of investors with Price-to-Earnings Ratio dropping to 2.31x, from the 3.27x in 2019. On the strength of its robust balance sheet and earnings, we upgrade the target price of Zenith Bank to N30, based on the 2020Q1 earnings report. This guidance is indicative of stronger performance, despite the gloomy economic situation.
Meanwhile, the cheap state of the bank’s share price and as a result, its attractiveness is further confirmed by the Book Value of N29.49 per share.

Analysts Opinion/Recommendations
Despite the dicey outlook of the Nigerian economy, and considering the low rates obtainable in Treasury Bills, the exposure to the country’s oil sector by most banks, and general downturn which is likely to slow down trading and fee incomes, going by the recent cut in bank charges, among others, the 2020 financial year is already a challenging one for most Nigerian banks may.
Traders and investors with short, medium, and long-term goals, who desire to preserve capital, should look the way of this stock while keeping their gaze on market trends. We, therefore, recommend a BUY on Zenith Bank for any investment objective.

Technical View

Zenith Bank’s price action has been on a bearish channel over the past three years, breaking down different support levels to test a five-year strong support level of N10.70 per share, before rebounding and oscillated on mixed investor sentiments. The candlestick formation after the bank released its Q1 earnings report signals indecision among market players, whose next direction will be determined by market forces in the new week and month.
The bank’s Relative Strength Index is reading 39.14, while Money Flow Index is looking down at 28.85, signaling profit-taking on a monthly time frame. Over the past seven months, the bank’s price action has side-ranged or trended, before breaking down on markdown for dividend proposed by the board, as well as the bearish sentiment induced by ravaging Coronavirus pandemic.

Four-Year Performance (2016-2019)
A critical look at the bank’s performance over the past four years shows a consistent improvement on the top and bottom lines, except in 2018 when it recorded a slowdown in investment and profitability ratios in the period under review. The high and low performance of the bank is revealed by the numbers in the tables below.

Gross earnings for the period oscillated to reflect changes in the economy, moving from N508bn in 2016 full-year, to its N745.19bn peak, before falling in 2018 to N630.34bn and rebounding thereafter to N662.25bn in 2019. Profit level has consistently been on the uptrend over the past four years, growing by 61.1% to N208.84bn in 2019FY, from N129.65bn in 2016. Similarly, Earnings Per Share remained strong and steady at N6.65, regardless of the over-regulation in the industry and the country’s unfriendly economic situation, as shown in the high Monetary Policy Rate (MPR), tight liquidity, rising inflation rate, dwindling discretionary income, and falling naira value. The bank’s earnings capacity rose from 413 kobo per share in 2016 to 566 kobo in 2017, and 616 kobo and 665 kobo in 2018 and 2019 respectively, despite the various headwinds in the industry over these years. The stable movement in Zenith Bank’s Earnings Yield despite the decline from 28.03% in 2016 to 18.25% in 2017 is a plus. We noted that it has maintained an uptrend since then to 24.3% in 2018, before peaking at 34.20% in 2019.

The bank’s robust dividend payout to shareholders continues to impact the economy positively, just as its Corporate Social Responsibility spending as seen in its being among the first organizations to contribute to the Lagos State Governments N2bn appeal fund in the aftermath of the blast that rocked Abule-Ado, a community in the Festac Town axis of Lagos. The bank also contributed generously to the Central Bank of Nigeria-led Private Sector Coalition Against COVID-19.

However, given the regulatory regime in Nigeria, investdata believes the bank’s management may need to strengthen its African business.
Investors, on the other hand, have followed the bank’s outstanding performance over time, taking strategic positions which continue to reveal value in the stock, while creating wealth as investors smile to the banks on a biannual basis.
Similarly, over the years, its Book Value has grown in the same direction from N22.44 per share in 2016 to N26.15 in 2017, N25.98 in 2018, and finally N30.00.
The consistent earnings growth and Investor confidence are expected to support its price, given that valuation tools place the bank’s stock at N30 per share.


Ambrose Omordion
CRO|Investdata Consulting Ltd
info@investdataonline.com
info@investdata.com.ng
ambrose.o@investdataonline.com

https://investdata.com.ng/2020/05/zenith-bank-2020q1-strong-balance-sheet-diversified-income-lines/