FSDH Research Page 1 Equity Research Report: Zenith Bank - NIGERIA Zenith Bank Plc- Driven 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 Equity Research Report
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FSDH Research Page 1
Equity Research Report: Zenith Bank - NIGERIA
Zenith Bank Plc- Driven 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 Equity Research Report
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Equity Research Report: Zenith Bank - NIGERIA
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.
*To be changed to December from 2009.
Price as at June 29, 2009 N13.64
Fair Value N16.69
Recommendation BUY
Table 1 : Company Summary
Ticker Zenith
Sector Banking
Date of Incorporation May 1990
Date of Listing October 21, 2004
Financial Year End September*
Number of Fully Paid Share 25,117,195,029
Current Capitalization(NGN) 342,598,540,195.56
NSE Capitalization (NGN) 5,986,336,226,962.87
% of NSE Capitalisation 5.72
52 Week high NGN 43.65
52 Week low NGN 11.13
YTD Return (%) (7.00)
52 Weeks Volume Traded 7,654,866
Trailing EPS NGN 2.21
Trailing P/E ratio (X) 6.18
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 - NIGERIA
Table 3: Professional Parties
Party Role
Zenith Registrar Limited Registrars
Price Water House Coopers Auditors
Sources of Information: Annual Report & Accounts, Bank’s website, CBN, NBS, NSE, and FSDH Research.
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
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 2003 2007 CAGR(%)
Total Assets 2,768 10,469 39
Advances 915 3,802 43
Deposits 1,409 5,363 40
Non-Performing Loans 0.24 0.39 13
Gross Earnings 510 1,755 36
Operating Income 356 1,193 35
Profit After Tax 74 407 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
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Equity Research Report: Zenith Bank - NIGERIA
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. 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
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
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.
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.
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
2.42%17.47%
4.87%
73.58%
1.08%
0.08%
0.09%
0.65%
Composition of Total Equity
Paid up share capital General Reserves
Statutory Reserve Share Premium
Small Scale industry reserve Contigency Reserves
1.00
5.00
9.00
13.00
17.00
2004 2005 2006 2007 2008
N'b
n
Total Liabilities Vs Total Assets
Total Liabilities Total Assets
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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%).
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 non-performing 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.
N/A – Not Applicable. G. Loans - Gross Loans, FA-Fixed Assets.
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.
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.
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
Core Capital 344.03 114.51 200.4 93.8 37.79 15.67 116.45
FA Revaluatn Reserve 0.32 0.08 305.72 - - - -
Minority Interest
2.27 1.87 21.54 - - - -
Total Equity 346.62 116.45 197.6 93.80 37.79 15.67 116.85
50.28%
30.84%
18.88%
Analysis of Gross Loan in 2008
Secured Against Real Estate Otherwise Secured Unsecured
50.00
250.00
450.00
650.00
850.00
1,050.00
2004 2005 2006 2007 2008
N'b
n
Loans & Advances to Customers Vs Deposits from Customers
Loans and Advances to Customers Deposits from Customers
68.36%
22.77%
2.77%
6.10%
Analysis of Gross Earnings in 2008
Interest Income Fees & CommissionForeign Exchange Earnings Other Income
1.00
101.00
201.00
2004 2005 2006 2007 2008
N'b
n
Profit After Tax Vs Gross Earnings
Profit after Tax Gross Earnings
0.50
2.50
4.50
6.50
8.50
10.50
12.50
2004 2005 2006 2007 2008
N'b
n
Classified Loans Vs Provision for Bad Debts
Classified Loans (Nm) Provision for bad loan
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Equity Research Report: Zenith Bank - NIGERIA
Funds, Government Bonds, and Advances under lease, respectively. The analysis of the interest income is presented on the chart below.
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.
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.
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.
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.
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.
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.
30.60%
64.69%
4.09%
0.62%
Analysis of Interest Income in 2008
Placements Loans & Advances
Government Bonds Advances Under Lease
5.00
55.00
105.00
155.00
2004 2005 2006 2007 2008
N'bn
Analyis of Income by sources :2004-2008
Other Operating Income Interest income
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Equity Research Report: Zenith Bank - NIGERIA
5.4 Management Efficiency 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.
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.
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. The proportion of total assets that was channeled to loans and advances also decreased in 2008 to 24.94% from 29.61% in 2007.
Loans & Advances to Customers Vs Deposits from Customers
Loans and Advances to Customers Deposits from Customers
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Equity Research Report: Zenith Bank - NIGERIA
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.
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
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 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.
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Table 11: Forecast Earnings
Year Ending December 15 months 2009 2010 2011 2012 2013
