Zenith Bank Plc

ZENITH BANK PLC

Ticker:                            ZENITHBANKNature of Business:    BankingLocation :                              Nigeria
Recent Price:           NGN23.1552-Week High/Low: NGN28.50/14.80Estimated Fair Value:      NGN34.31-NGN39.55
Expected Return:      49.2%Consider Buy:                   Below NGN36.00Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Strong

Company Overview
Zenith Bank Plc (ZENITHBANK), a top-tier bank domiciled in Nigeria, was founded on 30th May 1990 and began operation in June 1990. It was transformed into a public limited liability company fourteen years after incorporation.  Its shares are traded on the Nigerian Stock Exchange.

Organic growth lies at the heart of its strategy of growing the business. Having divested from its non-banking subsidiaries in line with a regulatory requirement, the bank's services are now limited to commercial banking and custodian services. The company’s subsidiaries are Zenith Pensions Custodian Limited, Zenith Nominees Limited, Zenith Bank (Ghana) Limited, Zenith Bank (Sierra Leone) Limited, Zenith Bank (The Gambia) Limited and Zenith Bank (UK) Limited. In addition, it has a representative office in China. Being one of the systemically important banks in Nigeria, ZENITHBANK boasts of total assets surpassing NGN8 trillion and shareholders’ fund of over NGN1 trillion.

Mr. Jim Ovia, its pioneer managing director and founder, remains the chairman of the board and has an 11.3% equity stake in the company. Mr. Ebenezer Onyeagwu, who rose through the ranks, spearheads the management team. Mr. Ebenezer, the managing director, joined ZENITHBANK in 2002 as a senior manager; and he became an executive director in 2013. Dame (Dr.) Adaora Umeoji is the deputy managing director of the company.

Investment Thesis
ZENITHBANK is adequately capitalised.  And we have no reason, at the moment, to believe that the quality of its assets is impaired. However, loan loss provision seems to be low (2020:4.8%; 2019:6.4%).  The bank's highest exposure is to the oil and gas sector. Loans and advances to this sector totalled NGN731.5 billion at the end of the 2020 fiscal year up from NGN619.4 billion of the previous year. Loans to this sector make up 25.1% of gross loans (2019:25.2%). What is worrisome is that this sector poses more risk and the loans to it form 65.5% of shareholders' fund compared to 65.8% of the past year.

Gross earnings comprise interest income and non-interest income. Non-interest income is growing and contributing more to gross earnings. Non-interest income was NGN275.6 billion in 2020, a year-over-year increase of 11.7%. In addition, its contribution of 39.6% of gross income surpassed the 11-year average of 28.5%. The cost of funds is low while the interest rate charged on customers' loans has dropped. Competitive pressure and regulatory constraints have made it difficult to continuously adjust upwards interest rates on loans to its customers. Consequently, the net interest margin has fallen over the years.

ZENITHBANK presently operates in four African countries of Nigeria, Ghana, Sierra Leone and the Gambia. Zenith Bank Plc (Nigeria), its flagship operation, accounts for over 80% of its earnings. The bank should endeavour to penetrate other markets in the rest of Africa in order to bolster revenue and profit margins.  Revenue from other parts of Africa grew by 9.4% in the year 2020; Profit After Tax (PAT) increased by 38.5%. Profit margins also increased; Profit Before Tax (PBT) margin was 45.5% in 2020, an 8.1% improvement over the previous year. Similarly, the PAT margin gained 6.9% year-over-year.

ZENITHBANK has a strong brand name; it has consistently grown total assets and shareholders’ fund. Total assets peaked at NGN8.5 trillion and shareholders' fund broke all previous records. Shareholders have enjoyed dividends regularly from the company and profits adequately covered dividends.

Valuation
Our valuation models produced a value ranging from NGN34.31 to NGN39.55 per share. The shares of ZENITHBANK are trading at a hefty discount from our fair value estimate. We advise investors to buy below NGN36.00 per share.

Financial Overview
The gross earnings of the bank increased by 5.2% to NGN696.5 billion at the end of the 2020 financial year. This was tantamount to a revenue decrease of 2.2% on a 3-Year Compound Annual Growth Rate (CAGR) basis. Revenue growth was largely driven by its two subsidiaries of Zenith Bank Plc (Nigeria) and Zenith Bank (Ghana) Limited. Both subsidiaries contributed 96.4% of gross earnings in 2020 (2019:95.6%). Revenue from Zenith Bank Plc was NGN595.9 billion, a 5.5% increase over revenue declared in 2019. Zenith Bank (Ghana) Limited generated 9.9% of the gross earnings of the group and grew its revenue by 9.3% year-over-year in 2020. ZENITHBANK’s operation in Ghana produced over 90% of total revenue made in its African subsidiaries outside Nigeria; it made a gross income or revenue of  NGN68.4 billion in 2020 compared to NGN62.6 billion in 2019. That is to say, 91.7% of revenue made in other African countries came from its operation in Ghana (2019:91.8%).

The interest income of NGN420.8 billion was an addition of 1.3% as against a 5.6% fall in the preceding year. Non-interest income, however, grew by 11.7% and 29.6% in 2020 and 2019 respectively. Fee and commission income was NGN 103.2 billion or 37.5% of non-interest income (2019: NGN114.7 billion or 46.5% of non-interest income). Net interest income rose by 7.1% while net fee and commission dropped 20.8% in a year.

The PBT of NGN255.9 billion posted in the 2020 fiscal year was 5.2% better than the prior year’s PBT. Profit After Tax (PAT) had a 10.4% step-up.  Net interest margin which stood at 37.4% was less than its 11-year average by 7.1%. PBT margin was flat while PAT margin added 157 basis points.  Return on Average Equity closed at 25.6% compared to 24.4% of a year earlier. Return on Average Assets was 3.6% at the end of the year 2020.

Earnings Per Share (EPS) surpassed the 11-year average of NGN4.36 by NGN4.03. Furthermore, the Book Value Per Share of NGN35.59 was 18.6% better than what was achieved a year ago. Total assets have been on the upswing, moving from NGN4 trillion in 2010 to NGN8.5 trillion in five years. Shareholders' fund climbed 18.6% year-over-year and was almost doubled in five years.

Customers’ deposits grew faster than the loans granted to them. Deposits swelled by 25.3% while gross loans expanded by 18.6%. About 4% of loans were not performing and the loan loss allowance was 4.8%. Total debt leaped by 72% to NGN1.3 trillion in the 2020 fiscal year. Debt was 16.1% more than shareholders’ fund but formed 15.3% of total assets.

Business Risk
ZENITHBANK derives most of its earnings from Nigeria and is not immune to any negative shock the Nigerian economy experiences. Low purchasing power and harsh economic conditions which are having their toll on the Nigerian economy would impact the earnings of the bank. Exchange rate volatility also poses a risk to ZENITHBANK since it has operations outside Nigeria and conducts transactions across national boundaries.

Recommendation: Buy

Earnings Chart of Zenith Bank Plc

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