Ebenezer Onyeagwu, Zenith Bank GMD


Equity analysts at Vetiva Capital have said Zenith Bank Plc profitability will remain best in class for financial year 2020. At the Nigerian Stock Exchange, investors valued Zenith Plc at ₦478.796 billion on 31,396,493,786 shares outstanding. Meanwhile, analysts target price for lender’s stock is pegged at ₦30.17, though it traded at ₦15.25.
This represents more than 86% upside, though the bank’s stock had lost 12.90% of its value year to date. Zenith Bank Plc reported impressive earnings in the first quarter of 2020 following an 8% year on year growth in top line. The uptick came despite a 7% year on year decline in interest income to ₦114.3 billion.
Analysts said the earnings improvement was driven by a 61% year on year income in non-interest income to ₦52.5 billion. This was however as result of 339% spike in revaluation gains to ₦14.7 billion.
The Central Bank of Nigeria had made adjustment to its official exchange rate from ₦305 to ₦360 to a dollar in the first half.
“We note that similar gain were recorded across the industry in the aftermath of Naira devaluation”, Vetiva said.
Also, despite an 89% year on year increase in provision to ₦3.9 billion and 20% growth in operating expenses to ₦71.2 billion, Zenith was able to maintain bottom line at ₦50.5 billion. Again, in spite of the fact that lender’s recorded 16% year on year improvement in income from loans, these gains were offset by 64% decline in income from Treasury Bills.
Going forward, analysts at Vetiva Capital said they are expecting further decline in interest income. Especially, in the second half of 2020 due to expected increase in loan defaults and persistently weak yield environment. On the other hand, analysts said the bank impressive non-interest income growth of 61% provides a potential upside for gross earnings.
In addition, analysts explained that FX revaluation and trading income are expected to significantly boost the bank’s performance in 2020. Vetiva capital stated in the equity note that it expects bank’s operating expenses to be contained at 10%. This will result to lower profit after tax projection of ₦199.6 billion in 2020 as against ₦208.84 billion in 2019.
This yields return on average equity of 20%, and expected earnings per share of ₦6.36 and dividend per share of ₦2.80.

…FBNH’s solid balance sheet to spike share price
FBNH Plc traded at ₦5.05 on Friday, though analysts have estimated price target that is more than double this market price. After its successful balance sheet repair program, FBNH has come out stronger. Investors value the brand at N₦181.271 billion for the outstanding shares on Nigerian Stock Exchange.
Given its focus on improving assets quality, its non-performing loans improved 7 basis points to 9.2% in the first quarter of 2020. Vetiva Capital Limited set price target of ₦11.37 for FBNH, which translates more than 125% upside when compare to its market price. The lender offers highest upside potential among top five banks due to lower valuation.
Vetiva Capital said it does not expect the bank to place much focus on meeting loans to deposit ratio requirement in the near term. In the first quarter of 2020, FBNH recorded a 9% year on year growth in gross earnings to ₦159.7 billion. This came despite 6% year on year decrease in interest income due to weaker yield environment in Q1.
Vetiva’s analyst stated that FBNH’s Q1 earnings came as a result of a 57% jump in non-interest income to ₦54.8 billion. This was however as result of 748% spike in income from sales of investment securities during the quarter. Plus, mild 12% year on year gain in fees and commission.
MarketForces had reported the lender’s increased investment in technologies aimed at boosting its retail footprint, following a positive drive to lift non-interest related businesses. Added to margin supportive drives, the bank reported a marginal increase in operating expenses to ₦76.6 billion. This happened at the time when inflation rate is racing speedily which indicates cost efficiency in the period.
Furthermore, due to cleaner balance sheet, the lender’s loan loss provision decreased by 30% year on year to ₦9.7 billion. Explaining the impact of the management strategic moves, Vetiva said that the decline in loan loss provision and tamed operating expenses indicate that the bank strategy of improving efficiency and managing risks is yielding results.
Vetiva’s analyst expects that the onset of COVID-19 pandemic would further test management’s strategy in the coming quarters. The earnings beat resulted to a strong uptick down the line as profit line spiked in Q1 2020 compare to base period in 2019. FBNH’s bottom line enjoyed double digit swings, beating analysts’ consensus estimates as profit after tax lifted 47% to ₦23.1 billion.
Vetiva capital confirmed that the lender’s profit level surpassed its ₦20.6 billion estimate for the period. Vetiva said Q1 2020 profit after tax recorded was highest since first quarter of 2013 when FBNH reported ₦24.7 billion. This gave the bank return on average equity of 15.3% up from 12.4% in financial year 2019.
On LDR, Vetiva Capital said it expects apex bank to grant some leeway with regards to the regulation, while it continues to use CRR debit as form of liquidity control. Ultimately, Vetiva said the current economic climate does not favour further loan growth, with contractions likely to come in subsequent quarters. Default rate is also likely to increase, the firm stated.
Vetiva projects profit after tax of ₦74.5 billion for 2020, this translates to return on average equity of 10.6% and earnings per share of ₦2.07 for the year.

…Okomu Oil: Performance rebound on the horizon
Quite a number of operators in the fast moving consumers’ goods sector with inelastic or at least partial inelastic demand are enjoying border closure. It means less competition with products with comparative cost advantage that is lacking in the local economy. Okomu Oil was embroiled in a tough competition from adulterated products from neighbouring countries.
Meanwhile, analysts said that stronger crude palm oil (CPO) prices will drive Okomu’s top line in the second half of 2020. There has been pressure on demand but government policy on border closure is positive for the palm oil producing company. Although, Vetiva Capital equity research analyst, Onyeka Ijeoma advises investors to sell following a ₦53.80 target price place on the stock.
On Friday, Okomu Palm Oil Company’s stock traded at ₦77.40 on the local bourse, as its market capitalisation settled at ₦73.832 billion. In 2019, Okomu Oil revenue moderated; then dropped 7% year on year to ₦18.9 billion. Vetiva’s analyst said the drop in revenue was driven solely by oil palm business line, with segment losing 8% of revenue in 2019.
Analysts explained that, according to the management, oil palm was negatively impacted by lower CPO pricing as illegal import of Olein, a form of refined CPO, flooded the market. The flood came despite a relatively stable demand, thus placing pressure on price. Meanwhile, analysts said in spite of higher CPO price, which rose 6% year on year, CPO revenue moderated. It was dragged by 14% moderation in selling price.
Vetiva’s analyst said the management confirmed a sharp drop in illegal smuggling since FG decided to close land borders.
“We now expect CPO revenue to jump 9% year on year to ₦17.3 billion, driven by a 4% increase in CPO production and 5% increase in average prices”, Vetiva explained.
With rubber prices expected to remain stable in 2020, and production forecast to rise by 11%, analyst projects a 10% jump in rubber revenue to ₦3.3 billion. Vetiva’s analysts expect Okomu Oil to record a 9% year on year growth in top line to ₦20.6 billion in 2020. The company’s earnings have been projected to pick up after two years of decline.
In the note, Vetiva Capital said after steady decline between 2017 and 2019, it expects Okomu Oil to report higher profit in 2020. Meanwhile, operating profit is expected to jump by 24% year on year to ₦9.2 billion, driven by expected reduction in operating expenses. However, profit will come in 14% higher, with growth temper by rising finance costs.
“We forecast a 15% year on year jump in profit after tax to ₦5.8 billion and 12-month target price of ₦53.80.

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