Two of Nigeria’s largest banks by capitalization, Guaranty Trust Bank (GT Bank) and Zenith Bank (Zenith) have declared their financial year 2020 returns. I decided to run through the numbers.
If you had to look over the results of a bank to invest in, what should you look for?
Capital & Gearing
The first is how capitalized is the bank? Nigeria currently has a minimum capital base of N25 billion, set in December 2005. The CBN Governor, Godwin Emefiele has indicated that as part of the new CBN monetary roadmap (2019 to 2024) the CBN will “pursue a program of recapitalizing the Nigerian banking industry to reposition Nigerian banks among the top 500 banks in the world.”
Currently, GTBank is the most capitalized bank in Nigeria with N912b ($2.02b), Zenith Bank has N706b ($1.56b) in paid-up capital. On the Nigerian Stock Exchange, only five companies have posted more capital than GTBank and Zenith Bank. However globally, both banks have a long way to go in catching the largest banks on the African continent which are all South African, with the leader Stanbic Bank posting Tier-1 Capital of $10b.
Overall, both banks appear well-capitalized on a regulatory basis but digging deeper, Zenith’s Current Ratio is 0.79 as compared to the GTBank ratio of 0.51. The current ratio indicates liquidity. You can say Zenith has more liquidity relative to GTBank but you can also say GTBank is investing her excess cash more than Zenith.
In terms of financing, Zenith has a higher Debt to Equity Ratio of 1.20 as compared to GTBank 0.27. This indicates that Zenith utilizes more debt financing than equity (N1.34t) as compared to GTBank (N223b).
Next, we consider earnings. Now, remember we are investors in the equity of the bank, so we are looking at return on our invested capital, as compared to both banks.
A good way to determine earnings to the investor is the Earning Per Share (EPS), which is the monetary share value, i.e., what every share issued by the bank will receive from declared earnings. The higher the EPS, the more profitable the bank is. Full Year EPS for Zenith Bank comes to about 7.34 per share, as compared to 7.11 for GTBank. This means that investors holding shares of Zenith get 0.23k more. Keep in mind, EPS refers to corporate value, it does not indicate cash value to the investors, to determine that we have to look at dividend yield.
Divided Yield is important because it brings in the market price of the bank stock and the cash dividends paid by the bank, this is most useful because it indicates the actual cash that flows back to the investor. The dividend yield for Zenith Bank is at 13.33% while GT Bank is at 9.68%. This means that investors in Zenith Bank get a higher cash yield per invested share. On the Nigerian Stock Exchange, only three stock have a higher Dividend Yield than Zenith Bank.
The dividend yield also allows investors to compare Zenith shares with other non-equity products like Treasury Bills and Commercial paper. If the yield on Fixed Income products is higher, then it is better you invest in Fixed Income because you get a higher yield at a lower price.
A final measure to consider is the Price to Earnings Ratio (P.E.) which is the Price of the stock divided by the earnings of the stock. P.E. is useful in determining how “cheap” or expensive a stock is. Based on market price, Zenith Bank is trading at N22.50 as of March 19th and GT Bank is trading at N31.00. It will be factually incorrect to simply say that Zenith is cheaper because the market price is cheaper, we have to look at the P.E. ratio.
Zenith Bank posts a lower P.E of 3, while GTBank posts a P.E. of 4.34. What this means is that with the current rates of earning in Zenith Bank, it will take just 3 years to match the market price of GTBank shares. In essence, Zenith Bank shares are cheaper.
In summary, assuming I had N100,000.00 to invest in January 2020. If I have bought Zenith and GTBank shares, I would have had more units of Zenith and earned more via a higher dividend yield. Zenith would also have posted a higher earnings value. Remember, I am just looking at both banks as an investor, there are other metrics that I cannot calculate from annual reports which are also essential in determining value and goodwill including brand power, workplace ethics, first mover, use of IT, Moat, and Vision.
Overall, both banks are among volume and dividend payout leaders, not just in their sector but in the NSE as a whole and remain firm in my “Hold” column.
This is not investment advice, please consult your advisor before making any decision.