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Need for Zenith Bank to increase risk asset exposure

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In spite of the challenging banking environment in 2013, Zenith Bank plc’s margins expanded, driven by higher asset margins and some benefits on the funding side, analysts at Renaissance Capital have said.

The analysts believe that Zenith Bank’s liquid and highly capitalised balance sheet was a key part of its strength during the year.

However, full year 2014 is set to present the bank with some revenue challenges, in the analysts’ view. First, asset yields on treasury bills have declined year-on-year (YoY), as the yield on interbank placements.

“We believe Zenith will have to increase its exposure to risk assets to chase better yields, as well as to offset the lost interest from the higher Cash Reserve Requirement (CRR),” according to them.

The Central Bank of Nigeria (CBN) at the last Monetary Policy Committee (MPC) meeting raised the CRR on public deposit to 75 percent from 50 percent last year. The increase, analysts said, will reduce banks’ earnings because it will reduce the amount of money banks have at their disposal to give out as loans and also cause an increase in the cost of funds for the banking system.

Secondly, the Renaissance Capital analysts say cost on commission (CoT) is significant at 38 percent of Net Interest Revenue (NIR) at nine month 2013. Last year, the drop in the cap to 0.3 percent had a muted impact, as Zenith Bank was already charging well below the cap.

“We expect a greater hit to CoT revenue this year, as the cap falls further to 0.2 percent,” they say, noting that the management is confident it can offset the loss revenue with new income sources, but think delivery on this front will be key to a continued re-rating of the stock.

“We also expect to see more subdued cost growth in 2014, after the significant adjustment in staff remuneration in 2013. This should help to offset some of the revenue challenges faced by the bank,” they say.

The analysts expect the full year 2013 tax rate to normalise to about16 percent, from the 1 percent reported in full year 2012. Hence, they expect full year 2013 profit after tax (PAT) of N95 billion, down 3 percent versus full year 2012, although they expect low-double-digit growth on the profit before tax (PBT) line.

For full year 2014, the analysts expect PAT of N103 billion, up 9 percent YoY. “The biggest risks we see to our forecasts are the fall in CoT revenue and cost growth,” they say, raising their target price to N29.2/share, from N25.3/share, and retain their buy rating.

The bank was established in May 1990. It became a public limited company in July 2004, and had an initial public offering on the Nigerian Stock Exchange (NSE) on October 21, of that year.

The bank’s expansion is not limited to Nigeria as it became the first Nigerian bank in 25 years to be licensed by the Financial Services Authority (FSA) in the UK for the commencement of banking operations by Zenith Bank (UK) Limited in April 2007.

It also has its presence in Ghana, Zenith Bank (Ghana) Limited, Sierra Leone, Zenith Bank (Sierra Leone) Limited, Gambia, Zenith Bank (Gambia) Limited, and a representative office in Johannesburg, South Africa, and Beijing, China.

By: HOPE MOSES-ASHIKE