Nairametrics staff subscribe to some analysts report online and once in a while, we like to share with our readers. This particular article from Capital Bancorp caught our attention and we thought to share with our readers.
It paired GT Bank and Zenith Bank, two of Nigeria’s biggest banks and gave a verdict on which stock will outperform the other by year end.
Scroll down to read, but as usual, this is not an investment recommendation or advice. Always consult a competent stockbroker for all your investment decision including this one.
Capital Bancorp: Analyst Opinion on the Guaranty Trust Bank Plc and Zenith Bank Plc Q1 ’18 Financial Results.
Zenith Bank and Guaranty Trust Bank Plc are direct line competitors and arguably, the largest banks in the country by metrics such as deposit size, the total number of clients, Shareholders funds, Net Asset, and physical branches count.
Therefore we will be seeking to compare apples to apples, like for like, in this report.
From the income statement, Guaranty Trust Bank plc grew Gross Earnings by only 4.65% compared to 14.52%growth by Zenith Bank Plc. That means that Zenith bank was more efficient in the use of equity to grow earnings. Such large difference in ability between Zenith Bank and Guaranty Trust Bank indicate that by year-end, Zenith Bank will deliver better gross earnings percentages relative to Guaranty Trust Bank.
In this light, Guaranty Trust bank from their 2017 full year statements has shown itself to be a more efficient bank, able to keep cost in control and more important, able to keep taxation under control. If Zenith Bank can realize such efficiencies in the light of its superior earnings, it will equal a superior profit after tax and better overall earnings per share.
Verdict: We advise on Zenith Bank as we expect them to outperform Guaranty Trust Bank Plc at year end.
This position is further buttressed by Guaranty Trust Bank’s Interest Income earnings which fell by 3.97% compared to the 2017 figure. Zenith Bank Plc grew same line item by 20.77%.
Interest income is the main source of earnings for a bank performing its basic reason for existence, which is the lending business. If a bank begins to earn less and fewer earnings on its loans and advances, it could mean that loan delinquencies have gone up or actual book-able advances and loans have reduced.
Both are not good signs for the bank, however. Increasing loan delinquencies inform us to provision for higher bad debt and write-downs, which have an end effect of reducing shareholders’ funds, or reduce profits. This happenstance is not a good way to run a bank.
Official figures for the total loan advances in the quarter for both banks was not released as it would have enabled us to compare with the total shareholders’ funds to determine how aggressive the loan policy of each bank has been, the riskiness of loan book and the bank in extension.
Profit After Tax.
Zenith Bank Plc grew its profit after tax by 25.55% for the quarter compared to 7.70% done by Guaranty Trust Bank Plc. This rings true with our earlier assertion that Zenith Bank Plc is a better BUY to Guaranty Trust Bank Plc.
Concluding, the only metrics by which Guaranty Trust Bank Plc has performed better than Zenith Bank Plc in this Q1 2018 is by Income tax expense where it accounted for less tax than its main competitor, Zenith bank. In extrapolation, it becomes difficult to explicitly state that Zenith Bank Plc will deliver better year-end Profit After Tax than Guaranty Trust Bank Plc if the trend of rising income tax continues. This is the basis by which Guaranty Trust Bank Plc claim better-operating efficiencies in the past financial year.
Overall, we think that the premium by which Guaranty Trust Bank Shares sells to Zenith is large at this point and that open up opportunities for a perfect arbitrage.
Nairametrics, this post Nailed it..Looking at the Q1, 2018 result, Zenith bank at 25% Q on Q growth is no doubt a preferred choice. I can’t imagine a bank under performing on its core income (interest on loans and advance). It is at this time of declining yield on fixed income securities that we will know the real banks.