Zenith Bank H1: Downward Valuation on Growing NPL/Mild Performance Indices

Coy: ZENITH BANK PLC. (ZENITHBANK)
Rating: Buy
Current Market Price: N17.00
NPL RATIO (Q2-2019):5.30%
Year High: N26.85
Year Low: N16.00
Fair Value: N35.80
By: Jeariogbe Tunde Segun (Equity Analyst)

Introduction

This report viewed the half year financial performance indices of Zenith Bank Plc for the period ended 30^th June, 2019, compare same with similar result in 2018 to establish growth
As in the previous half year, the management of Zenith Bank announced a 30k cash dividend, this is within several analyst’s expectations
The qualification date for the said cash dividend is 29^th August, 2019 while the payment date is 2^nd September, 2019.
The Non-performing Loan Ratio of Zenith Bank currently stood at 5.30% as against the 4.90% in the corresponding quarter of 2018. Please understand that at the end of the first quarter of 2019, the Non-Performing Loan Ratio was 4.98%
In our attempt to match valuation with economic growth expectations, we have re-valued Zenith Bank share price down from our previous Valuation, this, in our opinion is conservative enough and revealed the true stand of the economic state, especially the growing non-performing loan ratio, and the CBN mandate to increase Loan to Deposit (LDP) Ratios to 60% in the face of likely recession. See below for our fair value for Zenith Bank
See below for further analysis

ZENITH INT’L PLC
Bourse	Nigerian Stock Exchange
Code Name	ZENITHBANK
Sector	FINANCIAL SERVICES
Market Classification	PREMIUM BOARD
Nature of Business	Commercial Banking
Date of Incorporation	May 30th 1990
Date Listed	October 21st 2004
End of Accounting Year	31st December
Website	www.zenithbank.com
Registrar	Veritars Registrars Ltd
Auditor	KPMG
Share Price@Relsd (N)	17.00
Earnings per Share	2.83
Intrinsic Value(N)	35.87
Share Outstanding	31,396,493,786
Market Capitalisation	533,740,394,362

Company figures

Gross Earnings posted for the half year business activities was N331.58 billion, same as 2.91% improvement above the N322.20 billion achieved at the end of 2018 half year
Interest Income dipped by 6.15% from the previously reported N228.67 billion to N214.60 billion
In the same trend Interest Expense stood at 3.51% below the comparable period at the current N72.06 billion versus N74.70 billion
Net Interest Income was estimated at N142.51 billion, 7.43% below the N153.96 billion achieved at the end of the first six months of 2018
Operating Expenses adjusted down at marginal 0.74% to N115.52 billion against N116.39 billion in 2018 half year
Profit before Tax was estimated at N111.67 billion, this is only 4.02% improvement over 2018 half year estimate
Helped by lower income tax expense, the Profit reported for the period inched above corresponding quarter’s profit by 8.74% as it stood at N88.88 billion as against N81.73 billion

ZENITH INT’L PLC
Statement of Comprehensive Income
	2019(Mill)	2018(Mill)	%CHG
GROSS EARNINGS	331,586	322,201	2.91
INTEREST INCOME	214,601	228,670	6.15
INTEREST EXPENSES	72,086	74,709	3.51
NET INTEREST INCOME	142,515	153,961	7.43
OPEX	115,528	116,394	0.74
DEPRECIATION	9,791	7,967	22.89
AMORTISATION	1,514	1,117	35.54
PBT	111,677	107,358	4.02
TAX	22,795	25,621	11.03
PAT	88,882	81,737	8.74
TOTAL COMP INCOME	82,876	82,937	0.07
Statement of Financial Position
Total Assets	5,898,596	5,256,460	12.22
Total Liabilities	5,079,082	4,536,955	11.95
Net Assets	819,514	719,505	13.90
Retained Earnings	314,695	248,138	26.82
Total Deposits	3,810,025	3,165,955	20.34
Total Loans and Advances	1,801,833	1,873,173	3.81

Total Assets grew by 12.22% over the 2018 half year valuation. The financial institution assets is now valued at N5.89 trillion up from the N5.25 trillion in the corresponding quarter
Total Liabilities also grew by 11.95% to stand at N5.07 trillion against N4.53 trillion in the similar period of 2018
Net Assets is currently valued at N819.51 billion same as 13.90% above the previous estimate of N719.50 billion
Retained Earnings improved by 26.82% from the previous estimate of N248.13 billion versus N314.69 billion
Total Deposits equally appreciated to N3.81 trillion, a 20.34% growth over the N3.16 trillion achieved at the end of 2018
Total Loan and Advances for the period dipped marginally by 3.81% to stand at N1.80 trillion versus N1.87 trillion

Financial Strength/Solvency Ratios

Debt Ratio was stable through the two compared periods at 0.86x, signifying a controlled assets ratio through the period
Similarly Equity Ratio was stable at 14% within the two periods compared
Total Debt to Equity was estimated at 6.20x, 1.71% below the 6.31x in 2018 half year, this implied that Total Debt (Deposit inclusive) can replicate equity 6.20 times
We have currently estimated a Beta value above the market Beta for Zenith Bank Plc shares. Please note that at 1.05 beta value, it’s still below the industrial average of 1.34.

Financial Strength/Solvency Ratio
TICKERS	2019	2018	%CHG
Debt Ratio	0.86	0.86	0.24
Total Debt to Equity Ratio (MRQ)	6.20	6.31	1.71
Equity Ratio	0.14	0.14	1.50
TICKERS	ZENITH INT’L PLC	Industrial Average	%CHG
Beta Value	1.05	1.34	21.64

Profitability Ratios

Earnings before Interest, Depreciation and Amortisation (EBITDA) Margin from the Gross Earnings is currently estimated at 53.26%, a 9.02% drop in profitability from the previously estimated 58.56% in 2018
Pre-Tax Margin stood at 33.68% a marginal growth of 1.08% from the last estimate of 33.32% at the end of 2018 half year business
Interest Expense figure posted for the period is same as 21.74% of the Estimated Gross Earnings figure; this is a reduced position against the previously estimated 23.19%
Return Achieved on Average Equity used through the period was estimated at 10.85% this is below the 11.36% return achieved in 2018 half year
See below table for detailed profitability ratios and comparison

PROFITABILITY RATIOS
TICKERS	2019	2018	%CHG
EBITDA MARGIN	53.26%	58.56%	9.04
PRE-TAX MARGIN	33.68%	33.32%	1.08
EFFECTIVE TAX RATE	20.41%	23.87%	14.47
IE TO GE	21.74%	23.19%	6.24
ROAE	10.85%	11.36%	4.53
ROAA	1.51%	1.55%	3.10

Efficiency Ratios

Operating Expenses is estimated to be 34.84% of the Gross Earnings Value estimated for the period, this is a marginal drop from the 36.12% estimated from 2018 financial statistics
Similarly, Gross Earnings was estimated to be 5.62% of Total Assets, this is 8.29% drop in efficiency when compared to estimate from the corresponding period
Total Loan to Deposit Ratio achieved at the end of the quarter stood at 47.29% down from the 59.17% achieved in 2018 half year. Please note that this is below the CBN mandated 60% which was expected to be achieved for the third quarter of 2019

EFFICIENCY RATIOS
	2019	2018
OPEX TO GE	34.84%	36.12%	3.55
GE TO TA	5.62%	6.13%	8.29
LDR	47.29%	59.17%	20.07
Working Capital Ratio	1.16	1.16	0.24

Investment/Valuation Ratios

Profit made on each units of Zenith Bank shares at the end of the quarter had been estimated at N2.83 as against the previously estimated N2.60
Total Comprehensive Income per unit shares is estimated for N2.64
Price to Earnings Ratio adjusted for half year stood at 1.50x as against 2.30x in 2018
The said earnings per share is same as 16.65% of the current market price of Zenith Bank Plc shares on the floor of the exchange when the result was released this is a better yield when compared to the previous half year estimate
The current Book Value of Zenith Bank is N26.10, a 13.90% improvement from the N22.92 estimated last year
Confirming a seemingly under-priced position is the Price to Book Value ratio that stood clearly below unity

Investment/Valuation Ratios
Tickers	2019	2018	%Chg.
EPS	2.83	2.60	8.74
TCIP/SHARE	2.64	2.64	0.07
P/E-Ratio	1.50	2.30	34.72
Earnings Yield	16.65%	10.87%	53.20
BV/Share	26.10	22.92	13.90
PBV	0.65	1.05	37.68
CAPEX	1.24	0.40	209.41

Valuation

As noted in our intro above, we adjusted down of fair value for each unit of Zenith Bank Plc’s shares to N35.87 from the previous N40.89. Considering the distant between the current market price of the equity on the floor of the exchange and our achieved fair value, we rated it a Buy.