As far as the local bourse goes, Zenith Bank Plc has always topped the list of quoted financial institutions. The lender has demonstrated a decent level of consistency in terms of its profitability, while perpetually rewarding investors with one of the most attractive dividend yields in the market.
However, the pricing of the bank’s stocks appears largely discounted on a relative and absolute basis, making the stock attractive for value-oriented investors.
Interest cost moderation buoys topline performance – By leveraging its mainstream brand to keep cost of funds low and by ramping up demand deposits as a quotient of total deposits (51.00% to 54.00% Y/Y movement), Zenith has been able to effectively moderate the amount expended on interests, consequently putting the entire interest segment in the green in 9M 2021. Zenith’s recently released 9M results for 2021 revealed a growth in the net interest income by 4.25% to N234.75 billion, shrugging off a 3.13% decline in interest income, and drawing support from a 20.87% decline in the affiliated expense. Barring the subpar performance of interests from investment securities, the overall interest segment remains sound. Although a 14.70% increase in impairment charge weighed on the topline performance, a corresponding growth in loans and advances (11.41%) provided some justification for this. Furthermore, the cost of risk stayed unchanged (q/q) at 1.30%, assuaging concerns around impairment growth in the period under review.
Fee-based income supports non-interest segment – The non-interest segment continues to draw support from the impressive performance in the fees-based income items, with the lender increasingly growing the portion of its gross earnings derived from fees to diversify its revenue bucket. Fee-based income accounted for 18.00% of the total gross earnings in the review period (15.00% in 9M 2020), while recording a Y/Y growth of 25.82%. Decoupling the total fee-based income, the bank’s strategy to ramp up on demand deposits and to improve on its electronic product offerings boded well for it, as fees on current account maintenance and electronic products grew by 41.91% and 29.94%, respectively, with these two income line items accounting for 50.53% of the total incomes from fees in the review period. Consequently, the net fees and commission income inched up by 32.43% to N78.30 billion in 9M 2021, leveraging the aforementioned improvements in the fee-based income. Also noteworthy is a slight growth of 0.94% in the trading income, supported by the reversal of a loss position in derivatives, while trading in treasury bills and bonds pared (reflective of the challenging market environment this year relative to the last). Elsewhere, operating expense was up by 18.84% to N136.95 billion in 9M 2021.
Bottom-line inches up – The bottom-line performance of Zenith improved, supported by the interest segment growth and the dramatic rise in fee-based income. Hence, profit before tax and profit after tax increased by 1.43% and 0.80%, to N179.81 billion and N160.59 billion, respectively (as against N177.28 bn and N159.32 bn in 9M 2020). Similarly, earnings per share rose slightly by 0.79% to N5.11 in 9M 2021, from N5.07% in 9M 2020.
Loan book records improvement – Zenith’s loan book rose by 11.41% to N3.02 trillion, driven by a 15.62% increase in customers’ deposits for the period, while the loan-to-deposit (LDR) ratio declined to 50.00% in 9M 2021 from 51.89% in 9M 2020. The LDR falls significantly behind the 65.00% regulatory minimum set by the Apex bank. Elsewhere, the capital buffers of Zenith Bank sat comfortably above the 15% regulatory minimum, as it printed at 20.10% in the review period.
Zenith remains largely undervalued
It is interesting to see Zenith Bank gradually diversify its revenue streams to hedge against losses specific to its core banking business, as the lender is consolidating on steps that are now buoying its fee-based income. The strength of its earnings, alongside the robust capital buffers, creates a long-term confidence in the stock of the bank.
Accordingly, with an estimated fair value of N31.35, we suggest a long-term buy recommendation on Zenith Bank Plc; hence, providing an upside potential of 27.95% at the current market price.