Zenith Bank Plc

Equity Research Report: Zenith Bank -
Zenith
Bank PlcDriven by Technology
June 29,
2009
This publication is produced by FSDH Securities Limited (FSDH Sec) a
subsidiary of First Securities Discount House Limited (FSDH) solely for the
information of users who are expected to make their own investment
decisions without undue reliance on any information or opinions contained
herein. The opinions contained in the report should not be interpreted as an
offer to sell, or a solicitation of any offer to buy any investment. FSDH Sec
may invest substantially in securities of companies using information
contained herein and may also perform or seek to perform investment
services for companies mentioned herein. Whilst every care has been taken in
preparing this document, no responsibility or liability is accepted by any
member of FSDH for actions taken as a result of Information provided in this
publication.
FSDH Research
NIGERIA
FSDH
Equity
Research
Report
Page 1
Equity Research Report: Zenith Bank 1.0 Corporate Information
Zenith Bank Plc (Zenith) was incorporated on May 1990 as a private limited
liability company and started operations in July same year as a commercial bank.
It became a public limited company on June 17, 2004 and its shares were listed
on the floors of the Nigerian Stock Exchange (NSE) on October 21, 2004
following a successful Initial Public Offering (IPO). The bank changed its financial
year end from June to September in 2008 but will have to revert to December
from 2009.
Zenith currently has a shareholder base of over one million, an indication of the
strength of the Zenith brand. The management's commitment to excellent
banking practice has been richly rewarded in the form of numerous awards. In
October 2008, Zenith Bank was named ‘'Best Global Bank in Africa" by the
African Banker Magazine. The award came on the heels of another one, "Best
Bank in Nigeria" in 2008 by Euromoney. The bank had earlier in 2008 won two
major awards, ‘'Bank of the Year’' and '’Corporate Citizen of the Year’' at the
2008 ThisDay Award for Excellence. This is in addition to the '’CEO of the Year,'
which was won by the Managing Director for his sterling achievement in banking.
The bank also won two awards, ‘’Best Bank in ICT’’ and ‘’Best Bank in Export
Finance’’, at the Vanguard Bankers' Award held in April 2008. The Bank had the
following ratings in 2007: Fitch Ratings(AA-), Standard and Poor’s (BB-) and
Agusto & Co. (Aaa) Rating(1999-2007).
It retained excellent banking relationships with a number of well-known
international banks, allowing it to provide a bouquet of world class banking
services to suit the business needs of its clients. These international banking
partners include: Australia and New Zealand Bank, London, BNP Paribas, Paris
Citibank N.A., New York, Citibank N.A., London, Commerzbank Ag, Frankfurt
Deutsche Bank, London, Fortis Bank, HSBC Bank Plc, South Africa, JP Morgan
Chase Bank, New York and JP Morgan Chase Bank, London.
Zenith’s consistent investment in and deployment of information technology is a
deliberate strategic imperative. This gives the bank a superior competitive
advantage. The unique deployment of ICT to customer service delivery has
made the Zenith franchise synonymous with e-banking. The bank’s e-products
range covers virtually all services and fall into three broad categories:
payment/collection solutions, card solutions and reporting tools.
1.1 Structure
As at September 30, 2008, Zenith had nine subsidiaries namely: Zenith General
Insurance, Zenith Pensions Custodian, Zenith Securities, Zenith Registrars,
Zenith Life Assurance, Zenith Capital, Zenith Trustees, Zenith Bank Ghana,
Zenith Bank UK, Zenith Bank Sierra Leone, Zenith Bank Representative
Office South Africa and Zenith Medicare. The Bank has seven associated
companies incorporated in Nigeria, amidst them are: Qubit Spectrum, Venus
Telecom, CyberSpace Network, Omatek Computers under the Small and
Medium Enterprises Equity Investment Scheme (SMEEIS).
1.2 Business
Zenith Bank’s principal activity involves provision of comprehensive banking and
other financial services to its corporate and individual customers. Such services
and products are divided into two main sub-headings, the individual products
/services include; Account Opening, Investing, Zenith Mortgage loan, Zenith
Bureau De change, Western Union Money Transfer, Local Money Transfer, ATM
Locator, Internet Banking, Telephone/Mobile Banking, Online Bills Payment,
Ccards, Alertz, Z-Mobile, and ZECA (Zenith Children’s Account). The corporate
products/services include: Account Opening, Corporate Banking, Investment
Banking, Private Banking, Retail Banking, Corporate Finance, Treasury, Zenith
Funds, Corporate Internet Banking(ADPS Plus), Automated Cheque Writing,
Reconciliation Tool, Automated Payroll, Merchant Services, Trade Alertz and
Swift Pay.
FSDH Research
NIGERIA
Price as at June 29, 2009
Fair Value
Recommendation
N13.64
N16.69
BUY
Table 1 : Company Summary
Ticker
Sector
Date of Incorporation
Date of Listing
Financial Year End
Number of Fully Paid Share
Current Capitalization(NGN)
NSE Capitalization (NGN)
% of NSE Capitalisation
52 Week high NGN
52 Week low NGN
YTD Return (%)
52 Weeks Volume Traded
Trailing EPS NGN
Trailing P/E ratio (X)
Zenith
Banking
May 1990
October 21, 2004
September*
25,117,195,029
342,598,540,195.56
5,986,336,226,962.87
5.72
43.65
11.13
(7.00)
7,654,866
2.21
6.18
*To be changed to December from 2009.
Table 2: Directors’ Shareholding as at September 30, 2008
Director
Position
No of Shares
Macaulay Pepple
Chairman
3,918,973
Jim Ovia
MD/CEO
1,594,893,427
Godwin Emefiele
DMD
27,457,091
E. M. Egwuenu
Dir.
413,779,426
S.P.O. Fortune Ebie
Dir.
2,639,683
L.F.O. Obika
Dir.
2,328,409
Steven Omojafor
Dir.
1,518,833
Babatunde Adejuwon
Dir.
2,327,522
Baba Tela
Ex. Dir.
133,803
Peter Amangbo
Ex. Dir.
9,285,714
Elias Igbinakenzua
Ex. Dir.
11,352,353
Apollos ikpobe
Ex. Dir.
12,621,428
Andy Ojei
Ex. Dir.
9,792,857
Udom Emmanuel
Ex. Dir.
9,999,999
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Equity Research Report: Zenith Bank -
Table 3: Professional Parties
Party
Zenith Registrar Limited
Price Water House Coopers
Sources of Information: Annual Report &
NBS, NSE, and FSDH Research.
Role
Registrars
Auditors
Accounts, Bank’s website, CBN,
2.0 Review of Nigerian Economy
According to the Central Bank of Nigeria (CBN), Nigeria’s Gross Domestic
Product (GDP) grew in 2008 by 6.41% as against the growth rate of 6.45% in
2007. Even though the performance of the economy in 2008 was good in the
light of the global economic recession, it fell below the Federal Government’s
target of 9.8% for the year. The growth in the economy was driven largely by the
non-oil sector, while the crisis in the Niger Delta area and the current global
economic & financial crisis limited the contribution of the oil sector to the GDP.
According to the National Bureau of Statistics (NBS), the structure of the
Nigeria’s economy as at December 2008 (provisional) in term of sectoral
contribution to the GDP are: Agriculture: 42.07%; Manufacturing: 4.13%, Solid
Minerals: 0.31%; Telecomm/Postal Services: 2.90%, Finance & Insurance:
3.79%; Building & Construction:1.83%; Hotel and Restaurants:0.46%; Crude
Petroleum & Natural Gas:17.54%; Wholesale and Retail Trade:17.33% and
Others: 9.63%.
Currently, more than 95% of the country’s foreign exchange earnings and about
85% of its revenue is derived from crude oil. In addition, the economy has a very
high propensity for imported goods. The recent sharp drop in the price of oil in
the international market as a result of weak demand from the industrialized
nations and the weak non-oil exports in Nigeria as a result of infrastructure
deficiency, are responsible for the recent depreciation and subsequent
devaluation of the value of the country’s currency.
Some factors which have limited the growth of the economy includes poor
transportation system, epileptic power supply, poor comminucation system,
regulatory and institutional environment that are not cost effective for running
businesses in Nigeria and low access to long term finance.
The current administration is implementing a number of policies to diversify the
productive base of the economy so that the economy is less vulnerable to the
international oil price volatility. The government is addressing this through the
implementation of its 7- point agenda. In addition, it is embarking on a number of
reform agenda to stimulate economic growth, and strengthening public
expenditure management.
3.0 Review of Nigerian Banking System
Following the recapitalization exercise of the banking industry in Nigeria, the
country is gradually becoming the financial hub of Africa by expanding its
banking activities into other countries in Africa and recording accelerating branch
expansion. Since the consolidation exercise, the Apex regulatory body in the
banking industry, the CBN, has introduced a number of measures to strengthen
the supervisory and regulatory functions of the system. Some of which are:
The introduction of e-FASS which was designed to enhance the
efficient on-line surveillance of financial institutions.
The issuance of the Code of Corporate practice for Banks in Nigeria
that mandated banks to render monthly status report to the CBN.
In September, 2008 the Monetary Policy Committee of the CBN reduced the
Monetary Policy Rate (MPR) from 10.25% to 9.75%, Cash Reserve Requirement
Ratio (CRR) from 4% to 2% and Liquidity Ratio (LR) from 40% to 30% in a bid to
FSDH Research
NIGERIA
increase the liquidity condition in the market. Arising from its meeting of April 08,
2009, the MPC further reduced the MPR to 8%, CRR to 1% and LR to 25% in a
bid to increase liquidity in the system. The industry is beginning to experience
market induced-consolidation following the successful regulatory induced
consolidation/reconciliation in the industry.
The robust capital base of Nigerian banks was principally responsible for the
development of different products to service the banking community better and
bank the unbanked communities. Both the Institutional (Private sector and
Government) and the individual clients have benefited immensely from this
growth in terms of having capacity to finance the large ticket transactions that
were hitherto financed from offshore. In addition, the banking operators have
taken advantage of Information & Communication Technology (ICT) to bring their
services closer to their customers to improve efficiency and speed.
Nigerian banking community now operates banking transactions via the internet,
mobile phones and Automatic Teller Machines (ATM). All these efforts have
reduced the traffic in the banking halls while contributing to the non-interest
income of the Nigerian banks. We expect this trend to continue in the near future.
The quest of Nigerian banks to satisfy the needs of customers has led to
impressive growth in the industry. Available data from the CBN as at December,
2007 showed that the total assets in the industry stood at N10.47trn, up from
N2.77trn in 2003, representing a Compound Annual Growth Rate (CAGR) of
39%. Total Advances stood at N3.8trn in 2007 from N0.915trn, a CAGR of 43%.
Total Deposit stood at N5.36trn from N1.41trn, a CAGR of 40%.
The quality of assets generated in the banking industry in the period under
consideration improved remarkably. The non-performing loan increased to
N0.39trn in 2007 from N0.24trn in 2003 and recorded a CAGR of 13%, as
against the CAGR of 43% recorded in Advances during the same period.
A cursory look at the industry profitability showed that the industry recorded
impressive profitability during the period. Gross earnings stood at N1.76trn from
N0.51trn, a CAGR of 36%. Operating Income stood at N1.19trn, up from
N0.36trn, while Profit After Tax (PAT) increased to N0.41trn from N0.07trn in
2003, a CAGR of 53%.
Table 4: Industry Performance Indicators
N’bn
Total Assets
Advances
Deposits
Non-Performing Loans
Gross Earnings
Operating Income
Profit After Tax
2003
2,768
915
1,409
0.24
510
356
74
2007
10,469
3,802
5,363
0.39
1,755
1,193
407
CAGR(%)
39
43
40
13
36
35
53
3.1 Recent Developments in the Nigerian Banking Industry
Unconfirmed sources said that a number of banks that were involved in the
finance of oil and gas business may have lost considerable amount of money
due to the recent sharp drop in the price of oil. Some Automotive Gas Oil (Diesel)
importers who obtained facilities to finance the importation of the product before
the price crashed are currently finding it difficult to meet their financing
obligations to their banks. This situation may lead to huge provision for these
loans and eventually lead to write-off. In addition, some Nigerian banks have
either direct or indirect exposure to the stock market; the value of this investment
is currently difficult to realize because of the bearish trend in the market. This
situation is improving due to the recent appreciation in the general market trends.
The CBN currently puts the value of such exposure to about N700bn. The impact
of these factors on the banks is in the areas of credit squeeze in the market and
Page 3
Equity Research Report: Zenith Bank -
We consider the huge provisions banks are making for exposure healthy to the
system as it will help to avert any crisis in December 2009, when they will be
required to harmonize their financial year. However, the magnitude of the decline
or loss in income will depend on how quickly policy makers across the world, and
Nigeria in particular, are able to arrest the current global crisis.
With the appointment of a risk management expert as the new CBN Governor,
we are confident that Nigerian Banking system will enter into a regime of placing
greater emphasis on best practices in risk management framework in the interest
of all stakeholders, especially investors.
4.1 Zenith Bank’s Corporate Governance
Information from the bank reveals that it is conscious of the twin concepts of trust
and confidence as an essential aspect of its business and is commitment to good
corporate governance in the conduct of its business and in its relationship with its
stakeholders- the regulators, the depositors as well as shareholders. The bank
continuously reappraises its processes to ensure that its conduct is in line with
good corporate and global best practices. The business of the Bank is driven
primarily by the Board of Directors, which exercises oversight over the bank’s
operations. The board exercises its oversight using the following key committees:
Board Credit Committee
Risk Management Committee
Executive Committee
Audit Committee
In addition to the afore-mentioned committees, the bank has in place other
standing committees. They include:
 Assets and Liabilities Committee
 Management Committee
 Management Credit Committee
 Risk Management Committee
 Information Technology (IT) Steering Committee.
Risk management is critical to the ability of the bank to continually create
shareholders’ value. The nature and complexity of the risks in its business
requires that it has strong and robust risk management structure to provide
adequate oversight at all levels of the Organization. The board of directors
assumes the overall responsibility for system of risk management and control in
Zenith Bank Group.
4.2 Strengths & Opportunities
Strong alliances with International Financial Institutions
Good profit margin
Good knowledge and expertise of domestic markets
Well diversified business portfolio to take advantage of emerging
opportunities in Nigeria & beyond
Strong brand name
Experienced and dedicated management team
Robust Risk management framework
4.3 Weaknesses & Threats
Shrinking interest margin
Increasing regulatory requirement
Sophisticated customers demanding improved service at less cost
Unrelenting war for talents which may lead to high labour mobility
Unstable global and domestic macroeconomic outlook in the short term
Depreciation/Devaluation in the value of Nigeria
Liquidity tightness in the local financial market occasioned by margin facility
FSDH Research
5.0 Analysis & Recommendation
Our analysis was based on Zenith Bank Group Account for the period ended 15months
September, 2008 compared with 12months June, 2007. In effect, the reported growth
between 2007 and 2008 did not represent the actual growth rate because the periods
covered were different.
5.1 Capital Adequacy
The paid-up share capital of Zenith stood at N8.37bn in 2008, up from N4.63bn in
2007 and recorded a Compound Annual Growth Rate (CAGR) of 52.49%
between 2004 and 2008. The increase in the share capital during the period was
partly on account of the bonus of 1 share for every 4 share already held in 2007
and the new equity capital raised during the period. The Bank raised N129.63bn
through its Public and Rights Offer exercise. The total equity of the bank
increased by 197.64% to N346.62bn in 2008 from N116.45bn in 2007 and
recorded a CAGR of 116.85% between 2004 and 2008. At N346.62bn, the total
equity is above the minimum capital requirement of N25bn in the Nigerian
banking industry.
Total assets increased substantially by 83.76% to N1,787.83bn in 2008 from
N972.94bn in 2007 majorly on account of 104.59% increase in cash and short
term funds which increased from N574.96bn in 2007 to N1,176.30bn in 2008.
Advances under finance lease also increased by 91.35% to N4.68bn in 2008,
from N2.44bn in 2007. Other contributors are: Other Assets from N24.18bn to
N40.33bn, a growth of 66.79%, Loans & Advances from N288.11bn in 2007 to
N445.84bn in 2008, a growth of 54.74%. Investments of N63.78bn which grew by
53.22% is made up of N45.71bn (71.67%) investment in Government securities,
N2.68bn (4.21%) investment in Small and Medium Enterprises and N15.39bn
(24.12%) investments.
Composition of Total Equity
73.58%
17.47%
4.87%
1.08%
2.42%
0.08%
0.65%
0.09%
Paid up share capital
Statutory Reserve
Small Scale industry reserve
General Reserves
Share Premium
Contigency Reserves
Earnings assets grew by 85.54% to N1,736.89bn in 2008 from N936.14bn in
2007 while Fixed assets grew by 38.43% from N36.80bn in 2007 to N50.94bn in
2008.
Total Liabilities Vs Total Assets
17.00
N'bn
potential decline or loss in income. The decline or loss in income may reflect in
the banks’ profitability in the current financial year. Already, the quarterly results
banks are reflecting these huge provisions. Gross earnings are growing more
than double the growth in PBT and PAT.
NIGERIA
13.00
9.00
5.00
1.00
2004 2005 2006 2007 2008
Total Liabilities
Total Assets
The proportion of Shareholders’ funds to total assets increased to 19.39% in
2008 from 11.97% in 2007 as a result of higher proportionate growth in the equity
than the assets. This is an indication that the bank was less aggressive in
creating assets in line with the growth in its equity. The total equity could
Page 4
Equity Research Report: Zenith Bank accommodate 77.75% of the total loans and advances in 2008, up significantly
from 40.42% in 2007, also an indication that the bank is less aggressive in
growing its assets in order to earn income. However, the proportion of the bank’s
equity used to support growth in fixed assets stood at 14.70% in 2008, down
from 31.60% in 2007.
5.2 Assets Quality
The quality of the bank’s assets dropped between 2007 and 2008. Gross loans
and advances increased by 56.21% to N459.57bn in 2008 from N294.21bn in
2007, while the total classified loans (non-performing loan) recorded an increase
of 137.72% to N9.56bn in 2008 from N4.02bn in 2007. The loan and advances is
structured as follows: Overdraft: N201.59bn (43.86%), Term Loan: N97.27bn
(21.17%), Commercial papers: N124.70bn (27.13%) and Other loans: N36.01bn
(7.84%).
Analysis of Gross Loan in 2008
Equity/Assets
Equity/L.&A
Fixed
Assets/Equity
2008
2007
Chg
2006
2005
19.39
77.75
11.97
40.42
7.42
37.33
15.16
46.97
11.46
30.85
30.84%
Unsecured
As a result of the growth in the non-performing loans, the non-performing loans
to gross loans(NPL) rose from 1.37% in 2007 to 2.08% in 2008, at 2.08%, the
non-performing loan to gross loans is one of the lowest in the Nigerian banking
industry. This is shown on table 9. We however note that the recent
developments in the banking industry would exert upward pressures on the NPL.
Should the non-performing loans turn bad, only 2.76% of the Shareholders’ funds
will be impaired as against 3.45% in 2007. The bank’s total provision for nonperforming loans decreased to 143.55%, down from 151.46% in 2007. A further
analysis of the gross loans of the bank shows that 81.12% of the gross loan is
secured, while 18.88% is unsecured. A further break down of the secured loan
indicates that 61.99% is secured against real estate, 38.01% is otherwise
secured.
Loans & Advances to Customers Vs Deposits from Customers
8.11
29.36
N/A
N/A
14.70
31.60
(16.9)
25.84
39.90
60.41
N/A
G.Loans (N’bn)
Classified
Loans (N’bn)
% of Classified
Loan
Classified
Loans/Equity
Stock
459.57
294.21
56.21
204.06
125.53
54.42
70.47
9.56
4.02
137.7
2.31
2.08
0.57
102.81
2.08
1.37
0.71
1.13
1.66
1.04
N/A
2.76
3.45
(20.1)
2.46
5.52
3.61
N/A
Paid Up Share
Capital
General
Reserve
Core Capital
FA Revaluatn
Reserve
Minority
Interest
Total Equity
4.63
80.72
4.59
3.00
1.55
52.49
60.55
25.29
139.4
10.45
8.43
7.27
52.49
344.03
114.51
200.4
93.8
37.79
15.67
116.45
0.32
0.08
305.72
-
-
-
-
2.27
1.87
21.54
-
-
-
-
346.62
116.45
197.6
93.80
37.79
15.67
116.85
5.3 Profitability
Gross earnings (interest income and fee & commission income) grew by
119.53% to N208.29bn in 2008 from N94.88bn in 2007.
Profit After Tax Vs Gross Earnings
201.00
101.00
1.00
N'bn
2004
1,050.00
850.00
650.00
450.00
250.00
50.00
2005
Loans and Advances to Customers
2006
2007
CAGR
8.37
2005
Profit after Tax
2004
2004
Asset Quality
N'bn
50.28%
Otherwise Secured
Table 5: Capital Adequacy Ratios
Capital & Reserves (N’bn)
18.88%
Secured Against Real Estate
NIGERIA
2008
Deposits from Customers
2006
2007
2008
Gross Earnings
The breakdown of the gross earnings of N208.29bn in 2008 shows that
N142.39bn representing 68.36%, was generated from interest income; N47.42bn
representing 22.77% was generated from fee & commission; N5.76bn (2.77%)
foreign exchange earnings and N12.72bn (6.10%) represents other income.
Analysis of Gross Earnings in 2008
Classified Loans Vs Provision for Bad Debts
22.77%
12.50
10.50
8.50
6.50
4.50
2.50
0.50
2.77%
68.36%
N'bn
6.10%
Interest Income
Foreign Exchange Earnings
2004
2005
Classified Loans (Nm)
2006
2007
2008
Provision for bad loan
Fees & Commission
Other Income
A further look at the interest income shows that 64.69%, 30.60%, 4.09% and
0.62% were generated from Loans and Advances, Placements & Short Term
N/A – Not Applicable. G. Loans - Gross Loans, FA-Fixed Assets.
FSDH Research
Page 5
Equity Research Report: Zenith Bank Funds, Government Bonds, and Advances under lease, respectively. The
analysis of the interest income is presented on the chart below.
Analysis of Interest Income in 2008
NIGERIA
Return on Capital Employed (core capital) ROCE declined from 22.42% in 2007
to 16.31% in 2008. At 16.31% in 2008, the bank’s ROCE declined by 24.55%
from 40.86% recorded in 2004. The bank could not generate enough profit to
keep pace with the increases in capital and reserves in the period under review.
64.69%
30.60%
4.09%
0.62%
Placements
Government Bonds
Loans & Advances
Advances Under Lease
Interest Income grew by 123.80% to N142.39bn in 2008 from N63.62bn in 2007,
while other operating income increased by 110.86% to N65.90bn in 2008 from
N31.26bn in 2007. Other operating income include: income generated from Fees:
N17.35bn; Foreign Exchange Earnings N5.76bn; Commissions: N30.07bn and
Other Income: N12.72bn. The total income generated by major sources is
presented in the chart below.
Analyis of Income by sources :2004-2008
N'bn
155.00
105.00
Whilst the Profit After Tax (PAT) attributable to ordinary shareholders increased
by 176.32% between 2007 and 2008 and achieved a CAGR of 77.57% between
2004 to 2008, the bank’s core capital increased by 200.44% between 2007 and
2008 and recorded a CAGR of 116.45% between 2004 and 2008. The Return on
Average Equity (ROAE) increased to 22.40% in 2008 from 17.86% in 2007. At
22.86%, it is of note that the bank’s ROAE compares favourably with its
comparables in the Nigerian banking industry. The Operating Profit Before Tax
(OPBIT) increased by 118.56% between 2007 and 2008, while the total assets
increased by 83.76% leading to an increase in the Return on Average Total
Assets (ROATAs) of 4.07% in 2008 up from to 3.23% in 2007.
55.00
5.00
2004
2005
2006
Other Operating Income
2007
2008
Interest income
The ratio of interest income to loans and advances, which represents interest
earned on loans and advances stood at 20.66% in 2008, up from 14.32% in
2007, while the ratio of interest paid to total deposits, which represents the cost
of funds stood at 4.52% in 2008, up from 3% in 2007.
Looking at the segmental analysis of the gross earning of the bank, N193.07bn
(92.69%) was generated in corporate & retail banking; N8.85bn (4.25%) from
Investment management & Securities Trading; N3.26bn (1.56%) from General
Health & Life Insurance, while N3.12bn (1.5%) was generated from other
sources. In the same vein, N50.44bn (89.89%), N1.56bn (2.79%),
N1.73bn(3.09%) and N2.38bn (4.24%) of the PBT was generated from corporate
& retail banking, Investment management & Securities Trading, General Health &
Life Insurance and other sources.
An analysis of performance by geographical segment shows that the bank
generated 95.11% of the gross earnings within Nigeria, 2.97% was generated
from the rest of Africa while 1.92% was generated from Europe.
The bank needs to pay attention to its interest expenses which increased by
181.52% from N19.04bn in 2007 to N53.60bn in 2008 as the growth in the
interest expenses was higher than the growth in the interest income. The net
interest income grew by 92.88% from N42.75bn in 2007 to N82.47bn in 2008.
Looking at the five-year performance, interest expenses rose to N53.59bn in
2008 from N3.33bn in 2004, leading to a CAGR of 100.27% between 2004 and
2008 higher than the CAGR of 73.52% in interest income between the same
period.
FSDH Research
Page 6
Equity Research Report: Zenith Bank Table 6: Profit & Loss Account (N’bn)
2008
2007
Ch (%)
2006
2005
2004
CAGR
GE
Interest
Income
Interest Exp
Net
Interest
Income
Other Operat.
Income
Total
Net
Income
B&D Debts
Operatin Exp.
Depreciation
208.3
142.4
94.9
63.6
119.5
123.8
60.0
37.29
34.9
22.9
23.93
15.71
71.76
73.52
53.6
88.8
19.0
44.6
181.5
99.2
10.4
26.83
5.62
17.3
3.31
12.4
100.27
63.66
65.9
31.3
110.8
20.93
12.3
8.2
68.25
154.7
75.8
103.9
47.76
29.3
20.6
65.54
6.3
83.9
8.4
1.8
43.9
4.5
245.3
91.2
87.3
1.3
28.10
3.12
1.97
15.9
2.3
0.39
12.1
1.7
99.78
62.41
48.09
PBT
Income Tax.
PAT
Minority Int.
56.1
4.1
51.99
0.38
25.7
6.9
18.8
0.10
118.6
(40.2)
176.9
273.2
15.2
3.7
11.5
-
9.2
2.0
7.2
-
6.4
1.2
5.2
-
72.05
35.78
77.57
-
NIGERIA
5.5 Liquidity
The total deposit liabilities of the bank of N1,185.89bn in 2008 were made up of
Demand Deposit(N629.44bn), Terms Deposits(N371.56bn), Savings(N48.66bn)
and Domiciliary Accounts(N136.24bn) in the proportion of 53.08%, 31.33%,
4.10% and 11.49% respectively. The low cost of funds accounted for 57.18% of
the deposit liabilities from customers, while high cost of funds accounted for
42.82%. As a result of deposit liabilities mix, the bank’s cost of funds stood at
4.52% in 2008 up from 3.00% in 2007. This is marginally higher than the
average of its comparables in the banking industry of 4.13%. The classification
of the deposit liabilities from the customers are presented in the chart below.
Profitability Ratios
PBT Margin (%)
26.94
27.06
(0.12)
25.98
26.25
26.76
N/A
PAT Margin (%)
24.96
19.79
5.17
19.15
20.50
21.69
N/A
Int. Incm/Loan
Advance
Net Int. Margin
Cost of Fund
Cost/Total
Income
Int.Income/GE
NonInt.Income/GE
ROAE
20.66
14.32
6.34
14.29
12.57
19.95
N/A
42.63
4.52
40.26
46.99
3.00
46.22
(4.36)
1.52
(5.96)
44.72
2.66
49.07
49.45
2.41
45.47
51.72
2.52
34.52
N/A
N/A
N/A
The ability of the bank to meet the short term cash requirements of its customers
improved in 2008 over 2007. The proportion of total deposit liabilities that was
channeled into loans and advances decreased to 37.60% in 2008 from 45.41%
in 2007.
68.36
31.64
67.06
32.94
1.30
(1.30)
62.16
37.84
65.55
34.45
65.64
34.30
N/A
N/A
The proportion of total assets that was channeled to loans and advances also
decreased in 2008 to 24.94% from 29.61% in 2007.
26.77
36.65
N/A
22.40
4.54
Loans & Advances to Customers Vs Deposits from Customers
The management of the bank improved on their efficiency between 2007 and
2008. The cost to income ratio declined from 63.73% in 2007 to 59.63% in 2008.
Operating expenses less depreciation increased by 91.23% to N83.85bn in 2008
from N43.85bn in 2007 and recorded a CAGR of 62.41% between 2004 and
2008. Staff costs which stood at N33.94bn in 2008 increased by 131.68% from
N14.65bn in 2007 and accounted for 40.48% of the operating expenses in 2008,
up from 33.41% in 2007. The proportion of the bank’s gross earnings that was
channeled into operating expense decreased to 40.26% in 2008, down from
46.22% in 2007. In a similar development, the proportion of gross earnings that
was channeled into staff costs increased marginally to 16.30% in 2008, up from
15.44% in 2007. The increase in the pre-tax profit per employee at N7.36mn was
higher than the increase in the staff costs per employee at N4.45mn in 2008.The
pre-tax profit margin decreased to 26.94% in 2008, down from 27.06% in 2007
while the post-tax profit margins increased to 24.96% in 2008, up from 19.79% in
2007.
FSDH Research
N'bn
5.4 Management Efficiency
1,050.00
850.00
650.00
450.00
250.00
50.00
2004
2005
Loans and Advances to Customers
2006
2007
2008
Deposits from Customers
Page 7
Equity Research Report: Zenith Bank Table 7: Liquidity (N’bn)
Cash
&
Balances
Advances
und lease
Other
Assets
Investment
Fixed
Assets
Current
Assets
Total
Assets
Deposit
Liabilities
Other
Liabilities
Other
Facilities
Borrowing
Deferred
Tax
Total
Liabilities
2008
2007
Chg
2006
2005
2004
CAGR
1,176.3
574.96
104.6
365.17
180.41
121.9
76.25
4.68
2.44
91.4
1.72
0.84
0.85
53.26
40.33
24.18
66.8
14.57
4.76
3.29
87.05
63.78
41.63
53.22
11.15
6.14
4.43
94.83
50.94
36.80
38.43
24.23
15.08
9.47
52.30
1,736.9
936.14
85.5
594.58
314.64
183.85
75.32
1,787.8
972.94
83.76
619.34
329.34
193.32
74.39
1,185.9
634.49
86.90
393.31
233.41
131.10
73.43
207.24
187.63
10.45
104.78
56.01
44.92
46.56
5.86
4.75
23.38
2.26
-
-
-
34.57
21.95
57.51
12.75
-
-
-
1.96
1.24
58.35
0.45
0.45
0.27
64.62
1,441.2
856.49
68.27
514.7
291.93
177.65
68.77
5.6 Investment Analysis
Investment analysis Zenith’ stock between 2004 and 2008 showed improvement
and overall stability. The earnings per share (EPS) increased from N1.68 in 2004
to N3.08 in 2008 representing a CAGR of 16.45%. This is shown on the chart
below.
NIGERIA
one interim. Therefore the total dividend and bonus earned less withholding tax
(on the dividend) are N27,118 and 5,353 respectively. The accumulated
shareholding increased by 87.50% to 11,471. The market value at the valuation
date is N156,467.85; higher than the investment cost. We note that the return
could have been higher than this but for the bearish trend in the market
occasioned by the global financial crisis, as at the time of the report. The total
value of the investment of N183,585.89 is made up of market value of
N156,467.85 and dividend earned of N27,118.04. The CAGR in return within the
period is 16.40 %( Please see table 10 below).
6.0 Half Year, 2008 Unaudited Result Update
The unaudited Q2‘09 result of Zenith Bank Plc. (ZENITH) for the 6 months ended
March 31, 2009 showed that its Gross Earnings (GEs) rose by 19.84% to
N109.68bn, compared with N91.53bn in the corresponding period of 2008. Profit
Before Tax (PBT) increased by 17.06% to N26.02bn between 2008 and 2009
from N22.22bn in the corresponding period of 2008. The tax provision which
increased by 7.3% between 2008 and 2009 to N5.72bn from N5.33bn in 2008
brought about a Profit After Tax (PAT) of N20.29bn in 2009 as against N16.89bn
in 2008, representing an increase of 20.14%.
Looking at the Bank’s profit margins, the costs associated with a unit income
increased marginally between Q2 ’08 and Q2 ’09. This is reflected in the PBT
margin which decreased to 23.72% in Q2 ‘09 from 24.28% as at Q2 ’08. This
shows that the bank’s total costs as a percentage of GEs stood at 76.28% in Q2
’09, up from 75.72% in the corresponding period of 2008. The bank needs to be
more cost efficient in order to cut down on its increasing operation cost.
However, PAT margin increased marginally to 18.50% from 18.45% in the
corresponding period of 2008. The low profit margin may be linked to the huge
provision for non-performing assets in the oil & gas and capital market. The result
also indicated that the percentage of the GEs, PBT, and PAT in the Q2 ‘09 to the
Full Year Audited GEs, PBT and PAT for the period ended September, 2008 are:
52.66%, 46.36% and 39.03%, respectively. Given the current run rate, the bank
should improve on both its top and bottom lines in order to meet its previous
year’s performance.
7.0 Valuation
Zenith paid a dividend of N1.70kobo to its shareholders in 2008 and N1.00kobo
per share in 2007. In addition to the dividend paid in 2007, the bank paid bonus
of 1 new share for every 4 shares to all the shareholders whose names appeared
in the Register of Members as at August 20, 2007. Meanwhile the dividend of
N1.70 per share paid for the 15months in 2008 is equivalent of N1.36 per share
for 12 months.
5.7 Return Analysis
An investment in Zenith Bank stock since January 04, 2005 at N15.69 recorded a
total return of 83.59% and a CAGR of 16.40% as at June 29, 2009. An
investment of N100,000 in Zenith stock in year 2005 purchased 6,118 units after
adjusting for transaction cost as at the time of purchase. The bank paid dividend
four times during the period under review and paid bonus twice – one final and
FSDH Research
In arriving at a fair value for Zenith Bank, we considered the current global
financial crisis and the likely impact of the crisis on the Bank’s earnings. It is
important to note that the fundamentals of Nigerian banks are strong but we
cannot completely rule out the possible impact of the crisis on the local banks
because of the integration of the Nigerian financial system with the world
financial system and economy. We project GEs, PAT, Free Cash Flow (FCF),
(PAT adjusted for movement in non-cash items) for the period ending 15 months
December, 2009, 12 months December 2010, 2011, 2012 and 2013. We project
GEs of N273.36bn, N317.33bn, N440.78bn, N574.89bn and N724.81bn, for
2009, 2010, 2011, 2012 and 2013 respectively. We project PAT of N33.59bn,
N45.18bn, N60.82bn, N78.02bn and N98.60bn and FCF of N44.61bn,
N57.97bn, N78.58bn, N101.20bn and N127.82bn respectively for the period.
We assumed a perpetual growth rate of 6.32%. We used a total of 25.12bn
shares. Applying a beta value of 1.32, risk premium of 10.04% and risk free rate
of 10.50%, we arrive at a cost of equity of 23.80% (our discount rate). Using the
above parameters, the Discounted Future Earnings Model (DFEM) generates
N14.53 per share, and the Discounted Free Cash Flow Model generates a value
of N18.85. To arrive at our value, we took an average of the valuation methods
which yields a value of N16.69 per share. The 2009 forward earnings and
dividend yield (EPS at N1.34 and DPS at N0.70k (with a payout of 52.35%)) at
our fair value are 8.01% and 4.22% respectively. Also, the 2009 forward Price to
Earning ratio is 12.48x. We therefore place a BUY on Zenith Bank Plc stock at
the current market price for capital appreciation and dividend payment.
Page 8
Equity Research Report: Zenith Bank Table 8: Result of Valuation
Valuation Metrics
Discounted Future Earnings
Discount Free Cash Flow
Fair Value
Current Price
Table 9: Comparative Analysis
Value Per Share
14.53
18.85
16.69
13.64
Discount to Offer Price(%)
NIGERIA
22.36
Zenith Bank Vs NSE Rebased (June '08 - June '09)
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
-
Indicators
Zenith*
Bank
First
**Bank
Union**
Bank
UBA**
*
GT****
Bank
Gross Earnings
Interest Income
208.29
142.39
155.29
116.72
112.99
82.03
104.12
68.21
Non-Int.Income
IT Inc/GEs(%)
NI Inc/GEs(%)
PBT
PAT
Total Assets
Deposit Liab.
Loans & Adv.
Classified
Loans
NPL/GL(%)
Cost of Fund
(%)
Total Equity
NPL/Equity(%)
65.90
68.36
31.64
56.19
51.99
1,787.83
1,185.89
445.84
38.58
75.16
24.84
47.69
36.54
1,527.54
700.20
459.37
30.96
72.60
27.40
33.01
26.86
1128.89
682.31
259.0
169.58
116.70
52.88
68.82
31.18
48.03
40.83
1,673
1,333
447.62
4.02
2.08
7.32
1.56
28.33
18.96
16.20
3.51
7.78
1.82
4.52
346.62
1.16
4.51
355.63
2.06
3.95
119.16
23.78
3.10
193.04
8.39
4.74
182.03
4.37
35.91
65.51
34.49
35.18
28.32
962.72
472.27
418.78
*September, 2008 15months **March 2008
***September,2008 12months, December, 2008 10months
Zenith Bank
NSE Rebased
Table 10: Annual Capital Growth & Returns Analysis of N100,000 Investment in Zenith Bank Plc since January 04, 2005
Value Receipt Period
Holding As At January
Bonus Shares Received
Cumulated Holding
Dividend Earned
2005
6,118
2006
6,118
6,118
3,854
6,118
6,057
2007
6,118
1,530
7,648
5,506
2008
7,648
2009
7,648
7,648
11,701
11,471
-
5,353
Amt Invested
Amt. used less cost
Share Price May, ‘05
No of Units purchased
100,000
96,000
15.69
6,118
27,118
Valuation
Date of Valuation
Accumulated Shareholding
% Increase in Shareholding
Price (N)
Market Value (N)
Total Dividend (N)
Value of Investment (N)
Cost of Investment (N)
Profit (N)
% Increase
CAGR
FSDH Research
29-June-09
11,471
87.50
13.64
156,467.85
27,118.04
183,585.89
100,000.00
83,585.89
83.59
16.40
Page 9
Equity Research Report: Zenith Bank -
NIGERIA
Table 11: Forecast Earnings
Year Ending December
Gross Earnings (N’bn)
Interest Income (N’bn)
Other Income (N’bn)
Interest Expense (N’bn)
Interest Margin (N’bn)
Bad Debts (N’bn)
Net Interest Income (N’bn)
Operating Income (N’bn)
Total Expenses (N’bn)
PBT (N’bn)
Tax (N’bn)
PAT (N’bn)
Shares in Issue (bn)
15 months 2009
273.36
206.46
66.89
74.91
131.55
12.65
118.90
50.13
123.00
50.13
16.04
33.59
25.12
2010
317.33
247.76
69.57
89.89
157.86
17.21
140.66
67.43
142.79
67.43
21.58
45.18
25.12
2011
440.78
346.86
93.92
125.85
221.01
25.81
195.20
90.77
198.34
90.77
29.05
60.82
25.12
2012
574.89
450.92
123.97
163.61
287.32
36.14
251.18
116.45
258.69
116.45
37.27
78.02
25.12
2013
724.81
563.65
161.16
204.51
359.14
46.98
312.16
147.17
326.15
147.17
47.09
98.60
25.12
31.24
45.00
39.76
(10.67)
(35.40)
75.53
18.34
18.34
12.29
1.34
0.70
12.48
8.01
4.19
52.35
16.08
20.00
20.00
34.51
34.51
78.08
21.25
21.25
14.24
1.80
0.94
9.28
10.78
5.64
52.35
38.90
40.00
40.00
34.61
34.61
78.69
20.59
20.59
13.80
2.42
1.27
6.89
14.51
7.59
52.35
30.43
30.00
30.00
28.29
28.29
78.44
20.26
20.26
13.57
3.11
1.63
5.37
18.61
9.74
52.35
26.08
25.00
25.00
26.38
26.38
77.77
20.30
20.30
13.60
3.93
2.06
4.25
23.52
12.31
52.35
Reality Checks
Gross Earnings Growth (%)
Interest Income Growth (%)
Interest Expense Growth (%)
Operating Income Growth (%)
PAT Growth (%)
Interest Income/Gross Earnings (%)
Operating Income/Gross Earnings (%)
PBT Margin (%)
PAT Margin (%)
EPS (N)
DPS (N)
P/E Ratio
Earnings Yield Growth (%)
Dividend Yield Growth (%)
Payout Ratio (%)
Source: FSDH Research
Contacts:
For enquiries please contact us at our offices:
Lagos Office: UAC House (6th-8th Floors) 1/5 Odunlami Street,
P.M.B 12913 Lagos. (Tel.) 234-1-2640160-9 (Fax) 234-1-2702890
Port Harcourt Office: Afribank Bank Building (2nd floor, 5 Trans
Amadi Road, Port Harcourt.(Tel) 234-084-463308 (Fax) 234-084463174.
Abuja office: Orji Uzor Kalu Plaza, Plot 979, 1st Avenue, Off
Ahmadu Bello Way, Cadastral Zone AO, Central Business District,
Abuja. (Tel) 234-09-6700535
(Website): www.fsdhgroup.com, www.fsdhsecurities.com
(Email) [email protected]
FSDH Research
Disclaimer Policy
This publication is produced by FSDH Securities (FSDH Sec) a
subsidiary of First Securities Discount House Limited (FSDH)
solely for the information of users who are expected to make their
own investment decisions without undue reliance on any
information or opinions contained herein. The opinions contained
in the report should not be interpreted as an offer to sell, or a
solicitation of any offer to buy any investment. FSDH Sec may
invest substantially in securities of companies using information
contained herein and may also perform or seek to perform
investment services for companies mentioned herein. Whilst every
care has been taken in preparing this document, no responsibility
or liability is accepted by any member of FSDH or FSDH Sec. for
actions taken as a result of information provided in this
publication.
Page 10