Earnings Report /
Nigeria

Zenith Bank: Q1 20 results – impressive trading income saves the day

  • Core revenues shrink by 9% yoy but trading gains push operating income up 8% yoy

  • Higher operating expenses and impairment charge weigh on profits, resulting in 1% earnings growth

  • Buy with NGN37.00 TP and 181% ETR

Nkemdilim Nwadialor
Nkemdilim Nwadialor

Equity Research Analyst, Financials

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Tellimer Research
30 April 2020
Published byTellimer Research

Zenith Bank reported Q1 20 net profit of NGN50.5mn (up 1% yoy) as lower net interest income (down 5% yoy), higher operating expenses (up 10% yoy) and higher impairment charges (up 171% yoy) weighed down earnings growth. In line with peers, loans picked up in Q1, up 12% qoq, while the NPL ratio remained constant at 6.8% over the quarter, despite an 11% qoq increase in Zenith’s stage 3 loans. Compared with Q4 19, net income down 18% due to lower fee income and higher operating expense.

Maintain Buy with an unchanged TP of NGN37.00 offering 181% ETR. Zenith is one of our top banking stocks, with ROE of 22.0% for Q1 20, strong capital ratios and a high dividend yield (12.9% for FY 19). It trades on FY 20f PB of 0.5x versus frontier peers at 0.8x.

Key positives

  1. Higher trading income gains (up 170% yoy) cushioned a 9% drop in core revenues, higher operating expenses (up 10% yoy) and impairment charge (up 171% yoy).

  2. Loans grew by 12% qoq as consumer credit rises (up 88% yoy) and corporate lending to commerce and manufacturing increases.

Key negatives

  1. Net interest income was down 5% as lower yields on loans and investment securities offset a 0.4ppt improvement in funding cost. The contraction in net interest income resulted in a 1ppt compression in net interest margin to 4.8%, over the period.

  2. Fee income was down 28% yoy on account of the lower e-banking income (down 38% yoy) as the lower fee charges outweigh the increased transaction volumes. 

  3. Net impairment charges was up 171% owing to what management describes as prudent risk management, resulting in an increase in the cost of risk to 0.5% in Q1 20 from 0.3%. 

Revenue supported by non-interest income: Operating revenue was up 8% yoy, coming in at NGN128mn. The bank reported a significant rise in trading income (up 171% yoy) from treasury bills trading. However, net fee and commission income was down 28% yoy driven by lower fees on electronic products, reflecting the CBN’s revised fee charges. Lower yields on loans and other interest-bearing assets saw net interest income decrease by 5% yoy despite a 0.4ppts improvement in funding cost as the bank rebalanced its deposit mix. 

Cost/income ratio rose by 1ppt to 51% as operating expense inched up 11% yoy to NGN65bn on account of increased admin costs and depreciation charges.

Solid loan growth saw the LDR increase to 61% as lending to general commerce, manufacturing and consumer credit contributed the most to the qoq loan growth. Deposits grew at a much lower rate up 5% qoq as the bank re-balanced its deposit mix to be skewed toward retail funding, which saw savings deposits increase by 25% yoy.

NPL ratio deteriorates slightly versus FY 19: Stage 3 loans grew 20% over the quarter to NGN127bn, but Zenith Bank’s NPL ratio remained unchanged at 4.6%. Provision coverage came in at 125%, 30ppts lower than in Q1 19 following a 170% jump in impairment charge.

Bank capitalisation remains strong: CAR ratio was down 3.4ppts qoq to 19.6%, as loan growth picked up considerably over the quarter. This, combined with liquidity ratios at 42%, should support further balance sheet growth over the medium term.