Is Zenith Bank share price still undervalued?

Is Zenith Bank share price still undervalued?

Zenith Bank’s share price is on a tear! Nigeria’s largest bank by market capitalization, has seen its share price rise by 38% since it hit a year low of N18 back in October.

The bank released its Q3 2022 results showing gross earnings grew by 19.7% to N620.57 billion, and profit after tax grew by 8.55% to N174.35 billion in 9M 2022. The bank’s trailing twelve months’ earnings per share is currently N5 per share similar to the earnings per share reported in the full year of 2021.

The Nigerian banking sector has experienced significant headwinds this year largely due to the central bank’s monetary policy which restricts the amount of cash banks can hold in their reserves. The impact is ostensibly on the bank’s net interest income growth and profitability explaining why its share price has struggled to hold on to high valuation multiples.

More recently, the central bank’s policies on cash withdrawal limits and the introduction of new naira notes appear to be giving banks a new lifeline. With more Nigerians expected to gravitate towards electronic banking, Zenith Bank appears positioned to take advantage except at the corporate end of the market where they are dominant.

In addition, the central bank’s increase in monetary policy rates has led to upward revisions of lending rates, a situation that is bound to reflect positively on the margin of banks, especially the likes of Zenith Bank with the balance sheet size to take advantage.

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These reasons are perhaps why the bank’s share price has galloped in recent weeks. At N24 per share, the bank is trading at a price-to-earnings ratio of 2.9x and a price-to-book ratio of 0.58. The bank’s share price also delivers a dividend yield of 12% based on its last paid dividend. This back-of-the-envelope valuation suggests Zenith Bank shares remain undervalued but from experience, there is more to the eyes when it comes to valuing banks.

Company valuations in Nigeria are often more sentiments than fundamentals as investors focus on short-term incentives to take positions. However, it is still important to assess the current valuation of the bank. At N24, Zenith Bank’s share price is still slightly undervalued when you consider its likely earnings per share when it reports its full-year results by February next year. Nairametrics projects around N9 per share which at a multiple of 3x could see the share price valued at N27 per share. This suggests there is limited upside for the stock to rise at a double-digit rate.

In another market a price-earnings ratio. of 3x used to value Zenith Bank will be very conservative and unrealistic. But we have not seen Nigerian banks trade at price-to-earnings multiples above 5x for a protracted period. That multiple will likely value Zenith at about N45 per share. Ironically, that valuation still appears acceptable under different conditions but it will be foolhardy to expect Zenith Bank’s share price to rise to this level in the near term.

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