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Zenith Bank: Between market sentiment and stock fundamentals

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By Emeka Anaeto, Business Editor

AS a week-long bear run seized the Nigerian Stock Exchange, NSE, last week sending negative signals on investment grade stocks, stockbrokers are expecting dividend yields and first quarter 2018 results to stabilise sentiments in the days ahead.

The All Share Index plunged 2.9 percent Week-on-Week, W-o-W, to settle at 41,935.90 points while Year-to-Date, YTD, return declined to 9.7 percent. The bearish performance was largely due to sell pressures in bellwethers in the Banking and Consumer Goods sectors, notably, Zenith Bank, Guaranty Trust Bank and Nestle Nigeria Plc, which all released impressive results for Full Year 2017 (FY’17).

Zenith Bank declares N785.19bn gross earnings for 2017

The stock prices went down with some stockbrokers saying the initial price rises had priced-in the expected impressive results. But brokers who spoke to Financial Vanguard believe the bearish sentiment would quickly bottom-out this week paving way for a re-surge in the share price after a mark-down for dividend payment.

Investment analysts at Afrinvest West Africa, a Lagos based investment house stated: “Although the market performed negatively, we believe this has created bargain hunting opportunities. Hence, we expect a rebound in the market as investors take position in fundamentally sound stocks that declined.”

Stockbrokers at FSDH Securities Limited told Financial Vanguard that Zenith Bank is one of the key stocks with sound fundamentals historically and as confirmed by the recently released FY’17 results.


Zenith Bank’s current financials


In line with expectations of the investment community, Zenith’s performance was largely impressive. Gross earnings surged 46.7% Year-on-Year, YoY, to N745.2billion. The Bank’s Interest income rose 23.4% YoY from N384.6billion in FY:2016 to N474.6billion in FY:2017 following increased yield on loans and advances (from 10.9% in FY:2016 to 11.8% in FY:2017) while Non-interest income surged 119.2% YoY to N270.6billion in FY:2017 from N123.4billion in the prior year, majorly due to the significant gains recorded from trading activities (especially Treasury Bills   and Derivatives trading).

As noticed in 2017, more banks seem to be focusing on trading activities to boost income given the attractive yield environment. This has been particularly true for Zenith Bank which consistently recorded average quarterly trading income of N39.9billion between Q1:2017 to Q4:2017 from 2016 corresponding quarterly average of N7.1billion.

Analysts believe this is an income line that has come to stay as the bank takes advantage of opportunities in the market. Zenith Bank was also able to maintain its drive to optimize cost as Cost-to-Income Ratio (CIR) moderated to 42.9% from 48.0% in FY:2016 despite a 30.0% increase in Operating Expenses, OPEX (from N174.5billion to N226.9billion).

Accordingly, profit after tax, PAT, rose 37.2% YoY to N177.9billion from N129.7billion in the prior year while return on equity, RoE, improved to 23.4% from 20.0% in the prior year.

Further analysis of the bank’s FY’17 shows that the significant uptick in impairment charge was eclipsed by a marked increase of 456% in trading gains to N157.9billion in FY’17 from N28.4billion in FY’16. Notably, trading income on derivatives and treasury bills spiked by 242% to N68.7billion and by 928% to N88.8billion respectively in FY’17.

Describing this as impressive performance, financial analysts at CardinalStone Finance Limited, another Lagos based investment house, stated: “Gross earnings rose by 46.7% YoY to N745.2 billion, beating our estimate of N689.6 billion (+8.1% deviation). Surprisingly, after tax earnings rose by 37.2% to N177.9 billion, outperforming our estimate and consensus estimate of N157.9 billion (+9.3% deviation) and N159.52 billion (+11.5% deviation) respectively.

“Q4’17 revenue (+41.8% Quarter-on-Quarter, QoQ) came in surprisingly stronger than anticipated as non-interest revenue doubled, rising by 97.0% QoQ to N101.1 billion. Interest income also advanced by 13.4% QoQ despite the moderation in interest rate levels during the period.

“The surge in non-interest income was predominantly driven by huge trading gains (+445.2% YoY and +345.4% QoQ) from the bank’s derivative (+243.7% YoY) and treasury bill portfolios (+928% YoY). Overall, the bank reported a total of N158.04 billion in trading gains in FY’17 (+21.2% of total revenue) compared to N28.4 billion (+5.8% of total revenue) in FY’16. We believe the huge trading gains reported in Q4’17 is most likely as a result of mark-to-market gains on its treasury bill portfolio which reflects the capital gains impact of the declining interest rate environment.

Analysts’ recommendations

Analysts at Afrinvest gave what they called, ‘Compelling Investment Thesis for Zenith’ and stated: “The resilience of Zenith is clearly demonstrated in its FY:2017 performance and we have a positive outlook on future earnings in 2018 and beyond. In our view, the dividend yield (7.9%) on the stock is quite attractive given the current realities in the market and this presents a good opportunity for investors interested in dividend paying stocks.”

Referencing the opening share price of the Zenith Bank on the day the result was announced (last week Monday) Afrinvest analysts had these to say on the valuation: “Considering the pre-earnings announcement P/BV of 1.5x and current P/BV multiple of 1.2x, we believe the stock is currently undervalued and presents an attractive entry opportunity.

“In a scenario in which the stock trades at the pre-earnings release P/BV, we envisage an implied price of N39.25 on Zenith Bank which presents an upside opportunity of 26.8% against a price of N31.00 (13/03/2018).

“Against the backdrop of our expectation of positive performance in 2018 as well as the current attractive pricing on the stock, we believe it is Open Season on Zenith! and investors should be on the hunt for the stock.”

Another set of institutional investment analysts at WSTC Financial Services Limited, looking into the future of Zenith Bank equity stated: “We expect growth in net interest income in FY’18 to be driven by loan book growth and lower cost of funds in light of the moderation in yields on government securities.

“We have a fair value estimate of N32.83 per share for the stock and we retain our ‘HOLD’ recommendation. At the market price of N28.75, the stock was trading at a 14% discount to our fair value estimate.”

The post Zenith Bank: Between market sentiment and stock fundamentals appeared first on Vanguard News.

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