Mobile Banking And AfCFTA Will Unlock New Potential

Key Takeaways

• Major technology upgrades and digital product launches will rapidly scale customer acquisition, lower costs, and accelerate high-margin, non-interest income growth.
  
• Aggressive international expansion and strong deposit mobilization position Zenith to benefit from growing cross-border trade and resilient earnings, even amid shifting market conditions.
  
• Heavy reliance on trading and non-interest income, rising credit risk, increasing costs, and fintech competition threaten profitability and market position amid persistent macroeconomic and regulatory challenges.

Catalysts

Provides banking and other financial services to corporate and individual customers in Nigeria, rest of Africa, and internationally.

• While analysts broadly agree that Zenith Bank's IT transformation and core banking application upgrade will drive revenue growth, this significantly understates the impact-as the new technology sets Zenith up to rapidly dominate digital banking amid Africa's mobile penetration surge, unlocking exponential customer acquisition, drastically lower costs, and an inflection point in non-interest income and net margins over the next several years.
  
• The consensus identifies international expansion as a growth driver, but Zenith's rapid entry into developed economies, coupled with first-mover advantages in new African markets post-capital raise, positions the bank to capture outsized cross-border transaction flows and trade finance opportunities facilitated by AfCFTA, driving multi-year compound growth in both interest and fee income.
  
• Zenith's aggressive and successful deposit mobilization-evidenced by sustained growth in low-cost deposits and a CASA ratio above 77%-is set to structurally lower funding costs, support loan growth, and protect or even expand net interest margins even if interest rates decline, improving earnings resilience.
  
• The forthcoming launch of Zenpay and the Smart AFA trade portal creates a digital payment and intra-African commerce ecosystem uniquely positioned to capture surging transaction volumes from the region's youthful, increasingly digital population, which will accelerates scalable, high-margin non-interest income growth.
  
• Zenith's prudent balance sheet-demonstrated by robust Tier 1 capital, proactive provisioning, stable asset quality even during market shocks, and a track record of countercyclical dividend policy-enables outsized lending into Nigeria and West Africa's booming middle class and SME sectors, supporting long-duration revenue growth and increasing return on equity over time.

Zenith Bank Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Zenith Bank compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Zenith Bank's revenue will grow by 18.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 46.9% today to 42.6% in 3 years time.
• The bullish analysts expect earnings to reach NGN 1659.7 billion (and earnings per share of NGN 39.74) by about August 2028, up from NGN 1086.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 6.5x on those 2028 earnings, up from 2.6x today. This future PE is greater than the current PE for the GB Banks industry at 3.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 29.38%, as per the Simply Wall St company report.

Zenith Bank Future Earnings Per Share Growth

Risks

• Zenith Bank's trading gains and non-interest income in 2024 were heavily boosted by market volatility, particularly through FX and derivative instruments, which may not be replicable in a more stable or lower volatility environment, potentially leading to significant declines in revenue growth and earnings in future years.
  
• The proportion of stage 2 loans remains high, and impairment charges rose by 61% year-on-year, indicating underlying credit quality challenges that, if macroeconomic volatility persists or risk controls falter, could further elevate non-performing loan ratios and erode net income and net margins over the long term.
  
• Rapid increases in operating expenses, including ICT spending and regulatory charges, have pushed the cost-to-income ratio higher, and with further digitization and compliance requirements forecasted for the industry, sustained margin pressure could dampen profitability.
  
• The rise of fintechs and widespread digital disruption threatens Zenith Bank's dominant position in payments and traditional fee-based services, and if digital transformation lags or new digital offerings fail to resonate with younger, tech-savvy customers, both revenue and market share could come under sustained pressure.
  
• Zenith Bank's high exposure to Nigeria's macroeconomic and currency volatility, as well as heightened regulatory burdens such as increased capital requirements and FX directives, exposes it to frequent earnings shocks, unpredictable margins, and potential regulatory constraints on capital deployment, which could limit long-term return on equity.

Valuation

• The assumed bullish price target for Zenith Bank is NGN98.68, which represents two standard deviations above the consensus price target of NGN69.28. This valuation is based on what can be assumed as the expectations of Zenith Bank's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NGN102.0, and the most bearish reporting a price target of just NGN53.9.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be NGN3893.9 billion, earnings will come to NGN1659.7 billion, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 29.4%.
  
• Given the current share price of NGN70.0, the bullish analyst price target of NGN98.68 is 29.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.