Zenith Bank: How Tier-1 Capital Rich Lender Defied Gloomy Estimates
The projected gloomy outlook did not pan out as Zenith bank beats analysts’ estimates with better-than-expected earnings release.
The leading investment firms, Vetiva Capital and ARM Securities Limited among others have raised price target on the lender’s stock.
ARM Securities sets fair value per share at N30.2 (from N28), while a Vetiva Capital placed N30.92 (from N30.45) on the lender’s stock.
Tax advantage supported Zenith Bank earnings lift in the first half of 2020, just as gains from foreign exchange devaluation put shines to the result.
However, assets quality decline which then warranted increased loan loss provision in the period. Irrespective, the bank raise balance sheet size, supported by growth in total liabilities.
On the liabilities side however, significant uptick in total deposit put a face lift to the balance sheet size.
Specifically, the audited number indicates that a 2.2% expansion in pretax profit which was further boosted by 54.8% drop in effective tax.
Consequently, lender’s profit after tax (PAT) expanded by 16.8% amidst multiple health and economic challenges that underscore the first half of 2020.
ARM Securities said in its equity note that despite expansions in loan loss provision and operating expense, Zenith bank recorded a significant decline in interest expense together with an increase in net interest revenue (NIR) which helped support PBT growth.
Furthermore, Zenith bank declared an interim dividend of N0.30/share, which is considered the big banks general mid-year ritual.
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This interim payout translates to a dividend yield of 1.7% based on last closing price.
That said, analysts at ARM Securities said they have left most of their estimates unchanged save for the potential impact of the revised savings deposit rate on interest expense.
“We now expect PAT to expand by 6% year on year to N220.4 billion over financial year 2020”, analysts at ARM Securities projected.
The firm who had estimated the lender’s share price at N28 raised it to N30.2 due to improve earnings performance and right fundamentals.
For ARM Securities, this translates to a BUY rating on the stock based on last closing price.
“We continue to favour GTB and Zenith among the banks given their adequate buffers to withstand the prevailing pressures”, analysts stated.
ARM Securities position in the banking sector stocks remains that there are two leading earnings spinning lenders with track records for creating wealth for shareholder.
The investment firm categorically stated that Zenith and GTB continue to command a better return on equity.
Based on the track records, Zenith bank ROE printed at 21.5%, more than 500 basis points below GTBank which settled at 26.8%.
Even on efficiency, while Zenith bank cost to income ratio printed at 54.3%, which is considered high when compares with GTB’s 43.2%.
As mentioned earlier, interest expense declined by 17.4% year on year with cost of funds also contracting by 80 bps to 2.2%.
Analysts stated that the decline largely reflected early redemption of its May 2022 Eurobond note last year September.
Meanwhile, ARM Securities noted a 171 basis points year to date expansion in current and savings account (90%) which comfortably puts Zenith bank with the highest CASA mix among the banks.
Elsewhere, interest income expanded slightly by 1.1%. On balance, non-interest income increased by 10.5% with net interest margin up 40 basis points to 9.0%.
Analysts said the revised fees and charges stipulated by the Central Bank of Nigeria was more evident in Zenith bank’s earnings.
Precisely, E-business fee declined by 67% to N8.9 billion.
However, earnings support came for the lender as higher FX revaluation gain of 240% and T-Bills trading growth of 19% helped non-interest revenue.
Consequently, NIR expanded by 6.2%.
On asset quality, lender’s non-performing loan ratio expanded moderately by 40 basis points year to date to 4.7%, thus reflects management’s restructuring of loans.
However, analysts at ARM Securities stated that Zenith still booked higher loan loss provision of N23.9 billion, up 74.2% year on year with cost of risk also expanding by 40 basis points to 1.8%.
In the first half of 2020, the bank’s operating expense expanded by 7.1%, reflecting higher IT, fuel & maintenance cost, AMCON levy and personnel costs.
This translated to a higher cost to income ratio of 54.3%, having surged 110 basis points year on year.
On the quarterly numbers, analysts explained that while pretax profit came in lower by 5.9% quarter on quarter, after tax profit expanded by 5.5% reflecting lower tax.
ARM Securities held that drivers for the decline in pretax profit were decline in net interest income, expansion in operating expense and loan loss provision.
Interest income dropped by 10.25% in the second quarter over the previous one, reflecting the effect of COVID-19 as well as lower rate environment.
However, in spite of this, interest expense declined by 18.6% in the second quarter as against the first quarter, net interest income still fell by 6.9%.
“The solitary positive line item was an expansion in non-interest revenue which largely reflected higher T-Bills trading income.
“With the result in line with our estimates, we have left most of our estimates unchanged save for the potential impact of the revised savings deposit rate on interest expense”, ARM Securities explained.
Zenith Bank: How Tier-1 Capital Rich Lender Defied Gloomy Estimates
