Zenith Bank 2018Q3: Bigger Balance Sheet, Margins, Inspire Hope For Juicier Year-End

There is no doubt that Zenith Bank remains committed to international best practice and delivery of value to various stakeholders, situations that make its shares the toast of investors, especially as the management consistently keep to the post-listing requirement of the Nigerian Stock Exchange (NSE), by filing its numbers regularly as and when due. The bank’s historical data and pattern reveal steady growth in its earnings power on a quarterly and yearly basis, supporting its high dividend payout.
Last week, the bank submitted the 2018 Q3 numbers to the market, showing mixed performance, which however pointed to an improvement in management of its resources, as profit after tax rose, beating analysts and market estimates to remain the most profitable bank in Nigeria at a time gross earnings declined marginally. Despite the weak macroeconomic fundamentals and low yields government securities environment, Zenith Bank’s asset quality impacted positively on it profitability and investment ratios, revealing an intrinsic value that will create wealth for discerning investors in the medium to long-term.
The scorecard, gives an insight into how the 2018 full-year financials will be.
Specifically, gross earnings for period slipped by 10.67% to N474.61bn from N531.27bn in 2017, while bottom line rose 11.57% from N129.24bn in 2017 to N144.18bn.
The profit growth resulted from improved Net Interest Margin and the 69% drop in Loans Loss Provision from N47.05bn to N14.34bn. Also tax expenses for the period was flat, just as Net Assets inched up by 1.37%to N776.4bn from N767.69bn last year.
After processing the numbers, Earnings Per Share for the period went north to 459 kobo, from 411 kobo in 2017, representing an 11.67% growth, a replica of the price in 1.64x, which is lower than the 2.13x recorded last year, reflecting a decline in market value of the bank, irrespective of the improved earnings power.
Zenith Bank’s 2018Q3 book value stood at N24.73 per share.
The bank’s risk management and efficiency have improved; judging by its ability to retain 30 kobo of every N1 earned into is good, judging by the Net Profit Margin for the period stood at 30.38%.
Meanwhile, we note that the bank’s capital adequacy and liquidity ratio have remained above the regulatory requirement to solidify the bank’s fundamentals.

Source: NSE, Company Report and Investdata Research

On the strength of the bank intrinsicvalue and projected full year EPS of N5.42, we are positive about its performance at the end of the year, we expect income from investment securities to continue providing a buffer for NIM, given that the bank grew its interest yielding assets.
Thus, Zenith Bank is fairly priced at N38.58 per share, with a trailing P/E at 4.32x and Q3 Price/Book Value of 0.91x.
Investors with medium and long-term goals, who desire to preserve capital, should look the way of this stock, given that Book Value shows that it is undervalued, judging from its market value at below N24.73.
Improving numbers from the bank is expected to change the perception among the investing public towards its shares, and in the process drive its price subsequently.
We recommend a BUY for Zenith. Our target price is N38 per share, which is a 69.51% upside to the last closing price of N22.90 each.

Technical View

Price action of Zenith bank in the last one month has been ascending in a rising channel that supports continuation or reversal of the current trend. It has retraced up within the bull channel to resist further decline on a positive sentiment for Q3 numbers. RSI is reading 59.98 and money flow index is looking down to signal that funds are exiting the stock. The buying pressure on a Daily Time Frame is 50%, and Money Flow Index, 50.01 points, as it is currently trading above the two shortest moving average of 7 and 14 DMA.

Source: NSE, Company Report and Investdata Research

It is obvious that the bank aiming to become the first bank in Nigeria to hit the one trillion gross earnings and N200bn profit after tax marks, as it consistently seeks to set new records over the past 18 years. The bank has also grown bottom line to support net assets over the same period. Similarly, over the years, its Book Value has grown in the same direction from N17.60 in 2014 to N26.17.
Investor confidence and perception continue to support its price as valuation tools placed the bank’s stock at N38.

Four-Year Performance (2014-2017)
Numbers emanating from the bank over the past four years reveal a stable and solid performance as showed in the tables above and below, the impressive scorecard was heightened in 2017, when the bank attained a historic peak as reflected in its profitability and investment ratios.
Top line during the four-year period grew by 84.66% to N745.19bn from N403.54bn in2014, while profit level rose by 78.57% from N99.46bn to N177.61bn. This performance has supported the share price, as bottom line continues to trend in the upward direction on a quarterly and yearly basis amidst surprises to the market.
Within this period, the risk and cost management of the bank have improved significantly, resulting in an enhanced value creation for all its stakeholders. The nature and complexity of the risks in its business requires strong and robust risk management structure to provide adequate oversight at all levels. Earnings Per Share remained strong and steady at N5.66 regardless of the tight regulation within the industry and high cost of operation resulting from the infrastructural deficit across the country, particularly the poor power situation that has remained a drainpipe to most businesses.
The bank’s earnings power rose from N3.17 in 2014 to N3.37 in the following year, which was sustained in 2016 to post N4.13, despite the economic recession and industry headwinds during these years.
As we have mentioned earlier, Zenith Bank’s 2017 full-year EPS of N5.66 beat analysts and market expectations, a situation investors have reacted appropriately to, as the economy recovers gradually. Return on Equity over the period moved from 18% in 2014 to 21.62%, which is a pointer to the fact that it has created value for shareholders.