Zenith Bank Gross Earnings up 14.8%

Zenith Bank (“Zenith” or “the Bank”) yesterday released its audited FY:2014 result on the floor of the Nigerian Stock Exchange (NSE), outperforming our expectations. We present the highlights of the result and our FY:2015 estimates.

Gross Earnings up 14.8% Y-o-Y; PAT up 4.3% Y-o-Y
The wave of the release of banks’ FY:2014 results intensified yesterday, building investors’ momentum as  Zenith recorded positive growth in both top and bottom line notwithstanding Central Bank of Nigeria’s (CBN) numerous tightening policies in 2014 which tapered the industry’s earnings generation capacity. Zenith recorded an impressive growth of 14.8% Y-o-Y in gross earnings to N403.3bn (8.6% above our FY:2014 projection of N371.5bn) from N351.5bn in FY:2013. This impressive growth was achieved on the back of 39.1% and 15.9% Y-o-Y growth in non-interest income and interest income in FY:2014. The non-interest income was bolstered by two new line items; auction fee income (N3.0bn) and foreign withdrawal charges (N4.9bn) which accounts for 10.0% of total fees and commission income. A further breakdown of the interest income revealed that the growth was premised on the 46.0% growth in income from loans and advances to customers (loans and advances grew 38.2% Y-o-Y from N1.2tn to N1.7tn) as income from fixed income securities declined 21.5% Y-o-Y in FY:2014 (investment securities dipped 344.0% Y-o-Y from N303.0bn to N200.0bn).

In the same vein, the Bank’s PBT and PAT advanced 12.8% and 4.3% Y-o-Y, from N106.2bn and N99.5bn in FY:2013 to N119.8bn and N99.5bn in FY:2014 respectively. The moderation in FY:2014 PAT is attributable to the 51.0% increase in interest expense showcasing the Bank’s aggressiveness for deposit mobilization in 2014 amid stiff competition. This dwarfed the impressive growth in interest and non-interest income in FY:2014. Consequently, the Bank’s ROAE and ROAA for FY:2014 tapered to 18.7% and 2.9% from 19.6% and 3.3% in FY:2013.

Improved Efficiency as Cost to Income Remains Stable
Zenith’s Cost to Income ratio remained relatively flat at 55.2% in FY:2014 (vs 55.7% in FY:2013), obviously against the backdrop of improved operating income as OPEX spiked 11.2% Y-o-Y to N163.7bn in FY:2014. The various CBN policies that have squeezed income has spurred the banks to invent new avenues to earn income to cover up for the lost interest income from the increase in CRR on both public and private sector deposit in 2014. Although the Bank’s Cost of Funds inched higher to 4.4% in FY:2014, from 3.4% in FY:2013, on the back of 44.9% Y-o-Y increase in interest expense on time deposits in FY:2014. Similarly, NIM tapered marginally to 8.5% in FY:2014 from 8.7% in FY:2013 connected to the accumulated interest expense on deposits.

Strong Growth in Risk Assets: Up 38.2% Y-o-Y
Zenith remained aggressive in growing its loan books in 2014, recording a Y-o-Y growth of 38.2% to N1.7tn in FY:2014 relative to 26.4% recorded in FY:2013. The 5-year senior unsecured US$500.0m Eurobond raised in the first half of 2014 provided the leeway for the Bank to increase risk assets within the period under review. The Bank’s Loan to Deposit ratio berthed at 68.2% in FY:2014 (vs. 55.0% in FY:2013), 11.8% below the CBN’s 80.0% threshold. However, the significant growth in risk assets is in tandem with the CBN policy to drive lending in the Nigerian economy. The Bank’s robust Risk Management process provided more positive impacts as the Bank’s Cost of Risk moderated slightly to 0.8% in FY:2014 from 0.9% in FY:2013. Notwithstanding, the Bank’s impairment charges rose 18.0% Y-o-Y to N13.1bn from N11.1bn in FY:2013. A further breakdown of Zenith’s impairment charges shows that overdraft accounts for 83.2% and increased 35.5% Y-o-Y in FY:2014. We attribute the growth in the overdraft’s impairment charges to the recent developments in the oil & gas space as most operators may have challenges in meeting up with their obligations relating to the available credit line. In this light, we expect the Bank to review policies around overdraft loans to the oil & gas sector to tame the growing trend in subsequent years.

CAR Moderated to 20.0%, 4.0% above Regulatory Threshold
Zenith’s Capital Adequacy Ratio (CAR) continued on the downward trend Y-o-Y to settle at 20.0% (Basel II) in FY:2014 (vs. 26.0% in FY:2013 and 29.7% in FY:2012), traceable to the Bank’s aggressive growth in risk assets relative to available capital. The Bank’s CAR is 4.0% above the 16.0% CAR regulatory requirement for Systemically Important Banks (SIBs). As a result, we expect Zenith to raise additional capital via Rights Issue before the end of 2015 to increase its ability to increase risks assets, hence increase interest income.

The Bank Retains Highest Dividend Yield in the Industry
The Board of Directors has proposed a dividend of N1.75 (vs. N1.70 in FY:2013), translating to a dividend yield of 9.2% (highest in the banking industry) at N19.00 share price (06/03/2015). The closure of register for the dividend is fixed for 16^th March, 2015 while payment is scheduled for 27^th of March. We forecast a DPS of N1.87 in FY:2015 based on a pay-out ratio of 56.2%.

Outlook: We retain our BUY rating despite Revised Estimates
On the back of this notable performance, Zenith currently trades at a trailing P/E and P/BV multiple of 6.0x and 1.1x, compared to industry average of 5.2x and 0.9x respectively. As a result, the Bank is currently trading at a premium to its peers. We forecast a 13.2% Y-o-Y growth in gross earnings to N456.8bn in FY:2015 but revised downwards our PAT to N104.5bn for FY:2015 from N113.1bn earlier projected. This is as a result of the expected effect of the increase in the CRR on private sector deposits as well as the expected increase in impairment charges on the back of the lending to the oil & gas space which we expect will weigh on its bottom line. Subsequently, we have revised our target price downwards from N29.15 to N27.90. Based on the revision, the Bank currently trades at a 31.9% discount to our 12 months target price (market price is N19.00 as at March 6, 2014). In view of this, we maintain our BUY recommendation on the counter.

Source: Afrinvest Research, Nigeria