Recapitalisation: Zenith Bank’s Hybrid Offers As Reward For Investment

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Zenith Bank Plc’s plan to raise N290 billion through a combination of a Rights Issue and a Public Offer in compliance with the revised minimum capital requirements for Nigerian commercial banks introduced by the Central Bank of Nigeria (CBN) has set the stage for bountiful reward for its existing and new shareholders.

The Rights Issue offers 5,232,748,964 ordinary shares of 50 Kobo each at N36.00 per share, while the Offer for Subscription presents 2,767,251,036 ordinary shares of 50 Kobo each at N36.50 per share. The Rights Issue affords existing shareholders the opportunity to purchase additional shares in proportion to their current holdings and is being offered on the basis of one new ordinary share for every six existing ordinary shares held as of Wednesday, July 24, 2024. Conversely, the public offer for subscription is open to the general public and aims to attract new investors.

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This hybrid rights issue and public offer aimed at raising approximately N290 billion, will not only enable the bank to meet the CBN’s requirement but also provide additional working capital to support its expanding operations and investments in information technology infrastructure.

Currently, Zenith Bank’s issued and fully paid share capital stands at N15.698 billion, complemented by a share premium of N255.047 billion. To meet the CBN’s new stipulation, the bank requires an additional N229.225 billion. Despite its robust historical performance, the CBN’s new capital requirement has necessitated this substantial capital raise.

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.

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 recognises 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.

Speaking on the hybrid offer, the Group Managing Director/CEO of Zenith Bank Plc, Dame (Dr.) Adaora Umeoji, was elated and full of enthusiasm.

She said: “Zenith Bank’s N290 billion Rights Issue and Public Offer is slightly above the N230 billion required for us to meet the CBN’s minimum recapitalisation requirement. We are extremely pleased with the level of enthusiasm we have already seen from our existing shareholders for the Rights Issue. Beyond existing shareholders, incorporating a public offer is crucial to ensure that our customers, who are not yet shareholders, can have the opportunity to join in the ownership of this premium brand.

“In terms of Tier-1 Capital, Zenith Bank has been adjudged by The Banker, Financial Times to be number one in Nigeria and the only Nigerian Bank in the top 600 banks globally. Over the years, we have consistently rewarded our esteemed shareholders. Specifically, in the last five years, we have maintained the record as the highest dividend-paying Bank in Nigeria. In 2023, we set a record as the only Nigerian Bank to pay a dividend of N4 per share.”

She added that the proceeds from the capital raise will be channelled towards expanding banking operations across Africa and internationally, investing in technology infrastructure, and supporting working capital on an ongoing basis. She expressed optimism that given Zenith Bank’s track record of profitability and consistency in creating wealth for shareholders, the capital raise will be a resounding success. She assured prospective investors that Zenith Bank will maintain its leadership in dividend payout in the years ahead and encouraged them to invest in value and invest in Zenith Bank.

On a longer term, over the past five years, the share price has grown by about 57 per cent 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 second in Africa. The ranking is based on five 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.

According to the audited financial results for the 2023 financial year presented to the Nigerian Exchange (NGX), this impressive triple-digit growth in gross earnings resulted in a Year-on-Year (YoY) increase of 180 per cent in Profit Before Tax (PBT) from N284.7 billion in 2022 to N796 billion in 2023. Profit After Tax (PAT) also recorded triple-digit growth of 202% from N223.9 billion to N676.9 billion in the period ended December 31, 2023.

The group has continued to deepen its market leadership in key corporate and retail deposit segments as customer deposits increased by 69% from N9.0 trillion to N15.2 trillion in 2023. Its retail drive continues to yield dividends as retail deposits now constitute 46 per cent of total deposits (compared to 44 per cent in 2022) and grew by 77 per cent from N3.97 trillion in 2022 to N7.04 trillion in 2023, also reinforcing increased customer confidence in the Zenith brand.

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.

Zenith Bank’s strong financial performance adds to its appeal as an investment opportunity. The bank has consistently demonstrated resilience, with impressive profitability metrics and a solid track record.

Over the past five years, Zenith Bank’s share price has grown by approximately 57 per cent ,establishing itself as one of the most capitalisedbanks on the Nigerian Exchange Group (NGX) with a market capitalisation of N1.130 trillion.

In 2023, the bank emerged as the most profitable listed bank on the NGX, reporting a pre-tax profit of N795.962 billion. Notably, in the first quarter of 2024, Zenith Bank achieved about 40 per cent of its total pre-tax profit for 2023, indicating a strong trajectory.

Currently, Zenith Bank’s stock trades at a price-to-earnings (P/E) ratio of 1.30x—significantly lower than the banking sector average of 2.2x—suggesting it may be undervalued compared to its peers. Additionally, its price-to-book (P/B) ratio stands at 0.4, while its price-to-sales (P/S) ratio is 0.44, indicating a considerable discount relative to its book value and annual sales.

With earnings per share of N21.55 for the 2023 business year, Zenith Bank’s offers carry an earnings yield of about 60 per cent , the most attractive value addition among peers and competing offers. This simply means that beyond its industry-leading dividend payout, investors in Zenith Bank have significant value creation in the investment that can sustain above-average, long-term returns.

First quarter results for 2024 already indicated that the bank could surpass the 2023 performance in the current year. Gross earnings jumped by 189 per cent from N270 billion in the first quarter of 2023 to N781 billion in the first quarter of 2024. Profit before tax tripled by 267.8 per cent to N320 billion in March 2024 as against N87 billion recorded in March 2023. After taxes, net profit leapt by 291% from N66 billion to N258 billion. Earnings per share rose simultaneously from N2.10 to N8.22.

Investors and shareholders are optimistic that Zenith Bank will continue to keep the flag of the most profitable bank in the country as high as possible and that the hybrid offers are testimony of its desire to democratize wealth.