Nigeria Banking Sector Coverage - December 2011 'Bad ... - Imara

For the 9M results to 30 September 2011, gross earnings
were up 31.06% to NGN 183.0bn. Both net interest income
(up 48.85% to NGN 94.0bn) and non-interest income (up
33.64% to NGN 63.2bn) showed an impressive growth
trajectory. The growth in net interest income was
particularly impressive as income went up 29.73% against
a decline in the interest expense of 11.73%. This led to an
improvement in NIMs to 10.50% from 7.52% at H1 11 and
5.95% at year end. Fees and commissions income made up
the bulk of the non-funded income at 78.4% and were
mainly responsible for the increase in that line item.
Operating income increased by 42.58% to NGN 157.3bn,
but that notable growth rate was overshadowed by the
44.19% increase in operating expenses to NGN 99.9bn.
This led to the cost to income ratio declining to 63.52%
against 62.71% in the comparative period, continuing the
trend from the half year, where inflation and mandatory
provisions were cited as the main contributors to the
deterioration of the ratio.
The provisioning charge was 3.5x higher y-o-y at NGN
7.2bn, (NGN 5.4bn at the half year). The higher costs
diluted PBT growth to 28.03%, but a lower effective tax
rate reversed that impact with attributable earnings up
37.91% to NGN 42.5bn.
The bulk of the group’s earnings, 95.45%, came from the
Nigeria operation, with the ‘Rest of Africa’ contributing
NGN 1.24bn (9M 10: NGN 1.2bn) and Europe NGN 712.0m
against NGN 426.0m in 9M 10.
The balance sheet grew 7.30% from the H1 11 position to
NGN 2.2tn. Net loans and advances were up 5.79% to NGN
839.9bn, while deposits were up at a slightly higher pace
of 6.89% to NGN 1.5tn. The published NPL ratio showed a
30bp deterioration to 3.6% compared with 3.3% at the
interim stage, but was almost half the 6.4% ratio at FY
10. The loan to deposit ratio increased slightly to 56.60%
from 55.97% at H1 11. Rising yields on treasury bills were
reflected in the 23.11% increase in treasury bill holdings
to NGN 442.9bn. The CAR remained well above regulatory
requirements at 28.5% (H1 11: 28%).
ZENITH Q3 11 Results Summary (m) 30-Sep-11 30-Sep-10
Net interest income 94 015 63 161
Other Income 63 235 47 318
Operating income 157 250 110 479
Non-interest expense (99 891) (69 279)
Allowance for credit impairment (7 225) (2 041)
Operating profit 50 134 39 159
Attributable earnings 42 516 30 828
30-Sep-11
30-Jun-11
Loans and advances to customers 839 863 793 874
Deposits from customers 1 545 114 1 445 508
Total equity 380 604 367 754
Source: Zenith Bank
Outlook
Zenith will continue to focus on competing for market
share, but focused on the very competitive top end of
the corporate market, the strategy being to fund high
quality assets with cheap retail deposits. It will also
maintain its technologically driven bias, as well as
look for more opportunities for entering new markets
and further diversifying its product and geographical
mix. Cost containment is another facet the group will
focus on as it aims to keep driving down its CIR. The
bank is also expected to have completed its AMCON
sales as per the deadline set by AMCON of 31 October,
largely related to its exposure to Zenon.
We expect Zenith to more or less maintain the same
momentum in earnings as shown at the 9M results,
with an improved performance into 2012 buoyed by
improved margins, an increase in risk assets,
continued low NPL ratios and an improving CIR.
Valuation and Recommendation
Using a DCF valuation, we arrive at a target price for
Zenith Bank of NGN 16.68, representing 45.7% upside
on its current share price of NGN 11.45. After GTB,
this is our second favourite pick in the sector. BUY.
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