By: Eronmosele Aziba, AfrInvest
Zenith Bank Plc (“ZENITH” or “the Bank”) released its 9M:2016 result on Monday 24th October, 2016. The performance was broadly impressive -similar to the performance of its Tier-1 peers that have released results – as foreign exchange revaluation gains boosted earnings.
Expansion in Gross Earnings and PAT up 12.9% and 20.4% respectively.
In a reversal of the negative trend that persisted through Q1 and Q2:2016 in which both topline and bottom line declined, Zenith posted an impressive result for 9M:2016, broadly tied to the impact of forex revaluation on the books of the Bank. Gross earnings grew 12.9% Y-o-Y to N380.4bn in 9M:2016 from N336.4bn in prior period. The improvement in Gross earning was driven by 11.3% Y-o-Y (N256.7bn to N285.7bn in 9M:2016) growth in Interest income on account of increased interest on Loans & advances as well as a 17.9% Y-o-Y expansion (from N80.3bn to N93.7bn in 9M:2016) in Non-interest which was predicated on the 323.5% Y-o-Y or N23.7bn increase in foreign currency revaluation gains which stood at N31.0bn in 9M:2016. Notably, the Bank recorded a decline in Fees and Commission income owing to lower income from current account charges.
Zenith recorded a marginal increase in Interest expense, up 0.5% Y-o-Y to N95.9bn as the impact of a 140.6% jump in interest paid on borrowed funds (from N11.16bn to N26.7bn) was mostly offset by 22.2% (from N72.4bn to N56.3bn) Y-o-Y decline in interest paid on time deposits . Consequently, the Bank’s Cost of Funds (CoF) rose from 3.4% as at H1:2016 to settle at 3.7%. Accordingly, Zenith’s Net Interest Income (NII) appreciated 17.6% Y-o-Y to N189.8bn from N161.4bn in prior period while Net Interest Margin retracted 40bps to settle at 6.0% from 6.4% in H1:2016.
Unsurprisingly, the Bank’s Credit impairment charges surged within the period given the heightened risk in the system, up 124.8% Y-o-Y to N21.9bn in 9M:2016 from N9.7bn in 9M:2015. Also, against the cost cutting trend in the first half of the year, Operating Expenses (OPEX) increased 10.5% Y-o-Y to N141.4bn from N127.9bn in prior period. Notably a major factor that drove OPEX northwards was the 67.9% or N4.0bn increase in Fuel and maintenance cost – from N5.9bn to N10.0bn- which is reflective of the impact of price adjustment in domestic fuel prices underscoring the need for improved cost efficient bank branches. Nevertheless, Cost to Income Ratio (CIR) improved to 49.7% in the period from 51.7% in H1:2016 as the impact of the higher OPEX was offset by stronger growth in operating income. PBT and PAT expanded within the period, up 16.6% and 20.4% Y-o-Y to N121.3bn and N100.1bn respectively. As a result, RoAA and RoAE improved to 2.8% and 19.0% from 2.3% and 16.2% in the preceding quarter.
Risk Assets Grow despite Tougher Operating Environment
Zenith’s total Loans and advances jumped 27.4% to N2.9tn in 9M:2016, majorly buoyed by the expansion of term loans – about 52.5% of total loans & advances portfolio – within the period (up 30.5% from N1.2tn to N1.5tn). Also, the growth in loans can be tied to forex revaluation as about 38.5% of the Bank’s total loans were denominated in foreign currency as at FY: 2015. Accordingly, Impairment charges surged 124.8% Y-o-Y to N21.9bn in 9M: 2016 from N9.7bn in 9M: 2015 given the heightened level of credit risk in the system. Consequently, the Bank’s Cost of Risk (CoR) increased to 0.9% from 0.7% as at H1:2016. In the same vein, the Bank’s CoF rose to 3.7% from 3.4% in the preceding quarter, following a 5.2% and 36.9% growth in total deposits and borrowings which grew to N2.7tn and N883.6bn respectively. Loan to Deposit Ratio grew to 107.0% in 9M: 2016 (above the CBN’s recommended 80.0%) from 84.9% in H1:2016. Zenith’s Capital Adequacy Ratio settled at 19.0% in 9M:2016 (above CBN’s International Bank minimum requirement), similar to the level in H1:2016.
Positive Outlook; We Upgrade our Rating to “BUY”
Our outlook on Zenith for FY:2016 is broadly positive however, we believe the Bank needs to harp on efficiency as its guiding theme going forward, given the rising operating expenses. We forecast Gross earnings to grow 4.0% Y-o-Y to N449.9bn FY:2016 from N432.7bn in FY:2015 while PAT projection has been revised upwards to N116.4bn (from earlier projection of N84.6bn) for FY:2016 representing a 10.2% Y-o-Y growth while we forecast EPS to settle at N3.71. Zenith currently trades at a trailing P/E and P/BV multiple of 3.8x and 0.7x at a discount to peer average of P/E of 4.4x and P/BV of 0.3x. We have revised our 12-month target price upwards to N19.85 (from N17.14) with an implied forward P/E and P/BV of 4.0x and 0.7x respectively. This presents a 33.2% upside potential against a current price of N14.90 (25/10/2016), thus we upgrade Zenith to a “BUY” from a “HOLD”.
