Zenith Bank Plc has announced a Hybrid Rights Issue and offer for subscription, aiming to raise about N290 billion.
This move is significant as it marks a major step in meeting the CBN’s new minimum capital requirement of N500 billion.
With the Bank’s current issued and fully paid share capital of N15.698 billion and a share premium of N255.047 billion, Zenith Bank requires about N229.225 billion to meet this requirement.
Background
Zenith Bank Plc, a leading financial services institution, has a history of strong performance.
However, the new capital requirement set by the Central Bank of Nigeria (CBN) has prompted the need for this substantial capital raise.
Aside from meeting the CBN’s new minimum capital requirements, the offer prospectus indicates that undertaking the offers will also enable the Bank to make further investments in its information technology infrastructure and provide additional working capital to support its expanding operations.
Details of the Offer:
- IPO: 5.2 billion ordinary shares at N36.50 each, available to the public. Applications must be for a minimum of 250 ordinary shares and multiples of 250 ordinary shares thereafter.
- Rights Issue: 5.2 billion ordinary shares at N36 per share for existing shareholders.
- The offer, which opened on August 1, 2024, is expected to close on September 9, 2024.
The important consideration for investors and existing shareholders is whether these offers present good value. That said, Investors should consider Zenith Bank’s market performance.
Historical Performance and Market Capitalization
In 2023, the share price saw a year-to-date (YTD) gain of 61%. In the current year, the share price has seen a decline of 6.86%.
This decline in share price this year might raise concerns for existing shareholders.
However, this drop might present an opportunity to acquire additional shares at a favourable rate, especially with the rights issue priced at N36.00, below the 52-week high of N47.19.
On a longer term, over the past five years, the share price has grown by about 57% taking the bank as the second most capitalized bank on the NGX with a market capitalization of N1.130 trillion
In addition to the Bank’s share price performance, it is crucial to assess the Bank’s market position, financial performance, and the impact of the additional funds on its financial stability and potential for future growth.
Zenith Bank is one of the leading financial institutions in Africa. The Bank grew its shareholders’ funds from N20 million in 1990 to N2.32 trillion as of December 2023.
According to the Africa Report New TAR Index, the Bank currently ranks 2nd in Africa. The ranking is based on 5 criteria namely, profitability, liquidity, solvency, asset quality and size.
In 2023, Zenith Bank became the most profitable listed bank on the NGX, with a pre-tax profit of N795.962 billion.
While the bank has not yet released its Q2 2024 results, the first quarter results indicate that it has already achieved approximately 40% of its 2023 pre-tax profit.
The fact that Zenith Bank achieved about 40% of its 2023 pre-tax profit in the first quarter of 2024 indicates strong financial performance and momentum.
Aside from the impact of foreign exchange gains on its bottom line, Zenith Bank has demonstrated strong performance in its core operations.
The bank reported the highest net interest income of N736.182 billion in 2023, driven by substantial interest income of N1.14 trillion, with loans and advances contributing about 59%. The bank increased its loans and advances by 63% to N6.6 trillion.
The bank appears to maintain this loans and advances profile using the proceeds from the recent offers.
According to the offer prospectus, the bank plans to allocate about 37% (N36.74 billion) of the IPO proceeds to loans for corporate, SME, and retail sectors. While this could boost earnings, it may also increase the bank’s risk profile.
In 2023, the bank’s cost of risk increased by 128% to 7.3%, as loan impairments rose to N401 billion, one of the highest among banks in 2023.
In this context, maintaining a well-diversified loan portfolio across various sectors is crucial for supporting asset quality. While the bank considers its loan portfolio to be well-diversified, 24% of it is still exposed to the oil and gas sector.
Therefore, it may be prudent for the bank to further diversify its loan portfolio to mitigate the risks associated with over-reliance on any single sector. This strategy will enhance asset quality and provide a more stable foundation for future growth.
The bank is equally geared for expansion into other markets with the offer proceeds. It plans to allocate 35% (N34.7 billion) of the IPO net proceeds of N99.3 billion for expansion into other markets.
This strategy looks promising considering the contribution of its offshore subsidiaries to the group’s profit in 2023. At the end of the 2023 financial year, Zenith Bank had a presence in the UK and three other African countries: Ghana, Gambia, and Sierra Leone.
These offshore branches contributed 13% to gross revenue and 16% to the group’s profit before tax. More so expanding into new markets could potentially yield better results if the bank identifies and capitalizes on high-growth opportunities.
Takeaways for Shareholders
- The rights issue price of N36.00 is aligned with the current share price and slightly below this year’s average price of N36.92. This means existing shareholders can buy additional shares at a fair price relative to the current market and at a small discount compared to the average price for the year.
- The IPO price of N36.50 is slightly higher than the current price, it is below the average price for the year and the 52-week high price. This suggests that while the IPO price is somewhat elevated compared to recent prices, it still offers potential value to new investors, as it is lower than the average price observed over the year.
For investors, this means the IPO could present an opportunity to acquire shares at a competitive price relative to the longer-term average.
Attractive Valuation: The stock is currently trading at a price-to-earnings (P/E) ratio of 1.30x, which is lower than the banking sector average of 2.2x.
This suggests that Zenith Bank is undervalued compared to its peers, meaning investors are paying less for each unit of earnings relative to other banks.
Additionally, the bank’s price-to-book (P/B) ratio is 0.4, and its price-to-sales (P/S) ratio is 0.44.
These figures imply that the bank’s shares are trading at a significant discount to both its book value and annual sales, indicating a potential undervaluation by the market.
The attractive valuation metrics imply a potential for capital appreciation as the market recognizes the bank’s true value. For shareholders and investors, participating in the offer could provide an opportunity to acquire shares at a favourable price, potentially leading to capital gains.
The bank’s expansion plans and strategic use of offer proceeds could further boost growth prospects, increasing investor confidence.
Overall, while Zenith Bank’s capital-raising efforts through its hybrid rights issue and IPO may offer attractive valuations, the recent broader global market volatility might present a significant hurdle. Global market sell-offs threaten Nigerian Bank recapitalization plans
Investors may become cautious about participating in capital-raising efforts due to concerns about wider market instability.