This article serves as an update to my article late last year on Zenith Bank (NL: ZENITHB, LSE: ZENB). The stock price is up by more than 80% since the publication of the article and exceeded the targeted return of 35%, excluding the dividend, by a substantial margin. The question if there is still more value in this bank therefore almost invariably arises.
In essence I still consider Zenith to be amongst the best Nigerian Banks and a good longer-term investment. I am, however, somewhat more cautious about its share price performance for 2018 and have a target price of NGN 28.65.
Asset Quality and Capital
The bank’s NPL ratio increased by 188 basis-point YoY to reach 4.2%. This remains well below the average NPL ratio for the Nigerian banking sector as a whole of around 12%. The 188-basis point increase, however, came in above the 150-basis point increase in NPLs I had factored into my previous analysis.
Its aggressive NPL recognition in the First Half of 2017 should nevertheless reduce the risk of a substantial increase in NPLs in 2018. It may also be to early to conclude that the worst of the asset quality issues for Nigerian banks has passed but NPL formations certainly showed signs of slowing in the Third Quarter. Zenith’s NPL ratio in fact declined by 10-basis points QoQ in the Third Quarter which was the first decline in its NPL ratio since the onset of the Nigerian Economic crisis.
Its NPL coverage ratio at 110.3% is also reasonable in addition to the fact that it requires customers in the oil and gas sector with loan balances outstanding to hedge against price risks. These hedges have assisted these clients to maintain profitability whilst also protecting Zenith from some of the adverse effects of lower oil prices.
Zenith’s Capital Adequacy Ratio (CAR) at 22.2% also remains amongst the highest in the Nigerian Banking sector. It is also comfortably above the regulatory minimum required CAR of 15% for domestically systemic important banks and banks with international authorisation. Strong capital levels reduce the risk of a dilutive equity raise. The bank will, however, continue to retain a large portion of earnings in order to strengthen its capital position whilst its expanding rapidly across the African continent.
