Earnings Review H1: Zenith Bank Earnings Don’t Add Up But Still Beat Estimates

Zenith Bank released H1 earnings report at the end of last week and didn’t fall behind in earnings and revenue expectations. However, we didn’t see the same exponential earnings growth that First Bank churned in their H1 results.

Revenue

Zenith Bank increased gross earnings by 22.6% to N151b for the first half of the year with interest income making up a huge chunk of the contribution. Interest Income increased 39% from N79b in the first of 2011 to N110b in the first six months of 2012. However, interest income did come at a huge cost shedding off 28% in interest expenses for the period (First Bank was 21%). Nevertheless Net Interest Income grew by 26.6%. The Bank declined in earnings from commissions and fees dropping 7% to N24.5b in the first half of this year pointing to reduction in loan making and income from non interest business.

Expenses

The Bank managed to keep operating expenses low, a stat that was partly to blame for their poor margins in the full financial year of 2011. Operating profits thus grew37% to N48b, a figure that arithmetically differed from the N50b posted in their earnings report. At almost 44% operational profit as a percentage of operating income was higher than the 38% posted by First Bank.

Profit After Tax

Zenith Bank at the end of the first half of this year made a profit of N40.64b, 33% higher than the N30.4b it made in the same period last year. The increase however did not reflect in its profit margins as it marginally grew from 24% to 27% in the first half of 2012. However, this is still in line with its competitors showing the banks ability to post acceptable returns despite cost pressures. At 10% though, the returns on total equity was higher than the 7.7% obtained in the prior year but still short of the magical 15% I expect from blue chips.

Bottom Line

Zenith Bank has been consistent for years and utilizes an aggressive model that mostly keeps them within or ahead of competition. Like most banks it has relied on fixed income securities from the government in growing earnings. For example its reliance on treasury bills and government bonds grew over 137% and 96% respectively  from the same period last year taking up a combined 47% of its total interest income. However, I believe their reliance is on average lower than most banks in their competitive set. The bank will have to increase its loans by more than the 14% it did this half of the year if earnings of its core segment, interest, are to keep up with growth expectations. The high yields we see on TB’s and Bonds surely won’t last forever especially as the government identify the need to reduce local borrowing.

Zenith Bank is currently priced at N14.50, slightly higher than its average of N14.5 per share. Its P.E ratio of 8x is also on the “affordable” end leaving potential investors with a good upside for growth in the medium term. It also looks like a N20 share by year end with or without any astronomic growth by year end. As one of the big five, the “herd mentality” will surely propel its share price should that of First Bank and Gtb see remarkable growth (provided it doesn’t carry any huge provisioning). For me though, it is one of those shares I like to keep in a portfolio as its stability and reliability over the years help mitigate downside in a turbulent market. The bank gets a black ink