Zenith Bank Plc recently released its unaudited financial statements for the period-ended September (9M-22) 2022, a close analysis of which shows that Gross Income (GI) and Net Income (PAT) rose by 19.65% and 8.55%, at ₦620.57 billion and ₦174.33 billion respectively, compared to 9M-2021 numbers.
Clearly, the GI performance was strongly driven by Interest Income (INC), which rose by 26.5% y/y to ₦390.75bn (62.97% of total GI) amid improved expansion in the Group’s Loans and Advances to Customers (+26.3% y/y to ₦261.25bn). Other contributors to the GI are Net Income on Fees and Commission (16.1% of the GI), and Trading Income (14.7% of the GI).
INC bolsters by loan growth accretion
As noted above, INC was primarily driven by expansion in the Group’s credit advances to customers. In the 3-month ended September (Q3 ’22) 2022, it went up by 36.96% y/y to ₦97.84bn (+37.45% of total loans achieved in 9M ’22. Additionally, we noticed that investment in financial instruments such as Bonds and Treasury Bills provided better returns in the period under review compared to numbers achieved in 9M ’21. For instance, investment in government and commercial bonds grew by 39.7% y/y to settle at ₦86.43bn and represents 22.1% of the INC (20.0% in 9M ’21). Treasury bills (NTBs) return rose by 6.6% to ₦33.68bn, representing 8.6% of the INC (10.2% in 9M ’21). The reduction in NTBs contribution to 9M ‘22 could be attributed to increase allocation of fund to commercial papers’ investment (0.48% of INC vs 0.03% in 9M ’21). Note that within the period, the CBN’s Monetary Policy Committee (MPC) hike benchmark interest rate (Monetary Policy Rate (MPR) in May by +150bps, and in July by +100bps.
Higher business activities drove cost heads
In view of the expansion in INC, cost heads equally expanded. Notably, Interest expense rose by 45.6% y/y to ₦107.85bn, driven by a 36.8% y/y increase in interest paid on customers’ deposits. Cost on Current and Savings Accounts’ (CASA) deposits for instance rose by 59.5% in 9M’ 22 to settle at ₦29.71bn. Cost of handling term deposits also rose y/y by 28.9% to ₦31.28bn. Nonetheless, Net Interest income grew by 20.5% y/y, resulting to 33bps upshot in Net Interest Margin at 45.59%. Furthermore, Operating Expenses (OPEX) rose by 25.4%, mostly driven by regulatory fees (AMCON: 25.6% of OPEX), fuel and maintenance (13.4% of OPEX) and Information Technology (12.9% of OPEX). Note that fuel and maintenance expenses captured diesel usage, which unfortunately spiked by over 200% in the period under review, trading high at ₦805.45 per litre.
Net Income reflects growing business activities
Amid improvement in income heads, pre-tax profit rose by 12.7% to settle at ₦202.55 billion. Total tax expenses rose to ₦28.22 billion (following the increased effect of income, education and information tech, taxes), representing 46.9% higher than 9M ‘21 number. Notwithstanding the increased pressure on tax expenses, Net income (PAT) grew by 8.55% to settle at ₦174.33 billion compared to 9M ’21 number. With the improved PAT, computed 9M ’22 earnings per share (EPS) rose to 555kobo, 44kobo higher than 511kobo achieved in 9M ‘21, leading to a Price/Earnings Ratio (PE) of 3.62x at market price of ₦20.10 posted on Thursday, 27th Oct. 2022.
Asset quality continues to look up
The Bank’s asset quality continues to maintain positive momentum, as the total capital adequacy ratio improved to 23.0%, higher than 22.57% in 9M ’21, and significantly higher than the Basel III minimum regulatory requirement of 15.0%. Total assets stood at ₦11.34 billion, 29.6% higher than ₦8.75 billion achieved in 9M ’21. Noteworthy, it was higher than total liabilities, capping debt ratio below 1.0x at 0.88x.
We have a BUY recommendation on ZENITH
We have adjusted our target price on ZENITH to ₦25.00 from ₦30.00 targeted for a 12-Month waiting period. Our target price of ₦25.00 covers a waiting period 6-Month, covering period up to March/April 2023 when FY-2022 numbers and dividend announcement would have been released. Note: the adjustment became necessary in view of the current dynamics in the economy/country ahead of 2023 General Elections. The target price of ₦25.00 represents 24.4% upside opportunity against the closing market price of ₦20.10 posted on Thursday, 27th Oct. 2022. Markedly, the price of ZENITH has shed 25.12% from ₦25.15 it opened the year. In addition, after losing 25.12% year-to-date, ZENITH is trading at a deep discount to its peers and historical valuation. This presents an attractive entry opportunity for investors.
Accordingly, we maintain a BUY recommendation on ZENITH.
Zenith Bank Plc was incorporated on 30 May 1990 and was granted a banking licence in June 1990. The principal activity of the Bank is the provision of banking and other financial services to corporate and individual customers. Such services include granting of loans and advances, corporate finance, and money market activities. The Bank has six subsidiary companies namely, Zenith Bank (Ghana) Ltd, Zenith Pension Custodian (Nigeria) Ltd, Zenith Bank (UK) Ltd, Zenith Bank (Sierra Leone) Ltd, Zenith Bank (Gambia) Ltd and Zenith Nominees Ltd.
