Dipo Olowookere
By FSDH Research
The Nigerian equity market, as measured by the Nigerian Stock Exchange All Share Index (NSE ASI), depreciated by 12.42 percent as at the end of August 2019.
Our analysis of the performance of the equity market so far in 2019 shows that the Index recorded the highest depreciation of 7.5 percent in July.
FSDH Research notes that the declining crude oil price and fear of a possible global recession had negative impacts on the equity market.
Despite the current bearish trend in the market, we spot opportunities in the equity market. The two stocks we highlight here are: Zenith Bank and GTBank. Each has a history of good performance and good dividend payment; we believe the short-to-medium term outlook of these stocks are good. Therefore, investors should position in them as their share prices have recently dropped significantly.
Zenith Bank and GTBank are both strong players in the Nigerian banking sector. They both have footprints among the top-quality corporate customers. Both banks have consistent records of good asset quality and earnings.
They focus on low cost deposits from retail customers, therefore their cost of funds are low. This enables them to have good interest margin to drive profitability. They have remained the most profitable banks by absolute profit (Profit Before Tax and Profit After Tax).
The two banks have invested considerably in technology and deploy this service to existing customers and attract new ones. This has also generated a lot of non-interest income for them. Both banks operate a commercial banking licence with international focus.
FSDH Research’s analysis shows that Zenith Bank recorded improvements in both the top-line and bottom-line in Half Year (HY1) 2019 over the corresponding period of last year. The major drivers of the performance are an increase in non-interest income and its cost optimization strategy.
Although the Gross Earnings of GTBank dropped marginally in HY1 2019, it managed to record improved performance in profitability.
We attribute the drop in the gross earning to the decrease in interest income due to a drop in interest rate during the period. The growth in non-interest income and low interest expenses were mainly responsible for the growth in profitability
Our analysis of the latest results shows that GTBank is more efficient than Zenith Bank. Despite that, Zenith Bank is one of the most efficient banks in Nigeria. The efficiency ratio shows that Zenith Bank recorded the following as at HY1 2019; Net Interest Margin 9 percent; Profit Before Tax (PBT) Margin 34 percent; Profit After Tax (PAT) Margin 27 percent; Return on Equity (ROE) 11 percent (annualised to 22 percent) and cost–to–income ratio 53 percent.
GTBank however, recorded Net Interest Margin 10 percent; PBT Margin 52 percent; PAT Margin 45 percent; ROE 16 percent (annualised to 32 percent) and cost–to–income ratio 37.6 percent.
The Trailing Earning Per Share (EPS) for both banks stood at N6.39 as at HY1 2019. The Non-Performing Loan (NPL) ratio for Zenith Bank stood at 5.3 percent while that of GTBank stood at 6.8 percent and they are among the lowest in the banking industry.
Zenith Bank and GTBank have liquid balance sheets with well-diversified earning assets and sources of funding. Zenith Bank’s total assets as at HY1 2019 stood at N5.9 trillion while GTBank’s total asset stood at N3.6 trillion. Both banks’ assets are largely funded by customers’ deposits, with a strong capital base providing additional buffer for further growth. Loans and advances, and investment in Treasury Bills constitute the bulk of the total assets.
While Zenith Bank may need to create an additional N484 billion in loan assets to enable it meet the new regulatory requirement of minimum loans to deposits ratio of 60 percent, GTBank may need to create additional loan assets of N178 billion.
We recommend that investors with a long-term investment horizon take position in these two stocks at the current prices, which we believe offer significant upside potentials. Although recent global developments may have a short-term negative impact on the performance of the equity market, long-term investors may benefit from the long-term growth that the equity market offers.
The two companies usually give interim and final dividends, therefore, they are good stocks to be included in an asset manager’s portfolio.
The performance of stock prices of Zenith Bank and GTBank have also outperformed that of the NSE ASI in the last five years.
