- The group's Q1 21 net attributable profit grew 5% yoy to NGN53bn, above our expectations for a 2% yoy growth
- Fee income doubled, in line with management's commitment stated in FY 20, to grow income from electronic banking
- We reiterate our Buy rating on attractive dividend yield, solid operating efficiency, capital and liquidity position
Zenith Bank is one of our Nigeria banking top picks, on the back of the firm’s high cost efficiency relative to peers, digital banking drive, superior NPL provisions coverage and adequate capital ratios, as well as an attractive dividend yield (13.5% dividend yield vs 9.0% coverage average based on FY 20 total dividends). The Q1 results showed a 5% growth in profit, reflecting the increases in both net interest and non-interest income lines, as well as a drop in risk costs and taxes. We reiterate our Buy rating at a target price of NGN35.0, with an expected total return of 70%.
Zenith Bank’s net attributable profit grew 5% yoy to NGN53bn, slightly ahead of our expectation of NGN51bn. The group’s net interest income grew during the period but was below our growth estimate (2% yoy growth vs 13% forecast), but non-interest income was better than expected (4% yoy actual vs 1% yoy forecast). We had expected lower trading income to drag on growth (which it did, as it fell by 44% yoy). However, the group’s fee income doubled (the highest growth in our coverage), on strong e-banking and credit-related fees, offsetting the drag from trading income.
Operating costs were also better than expected, growing 6% yoy vs 13% expectation, as the group minimised growth in personnel and admin expenses. The impairment charge was also positive, as the group’s loan recoveries for the quarter outweighed that of Q1 20. Despite the profit growth, the group’s profitability metrics declined, with annualised ROE down to 19.2% and ROA to 2.5%.
Zenith Bank is a Buy, our 12-month target price of NGN35 suggests an ETR of 70%
We reiterate our Buy recommendation on Zenith Bank with an unchanged 12-month target price of NGN35, which translates to an ETR of 70% at its current share price. Our Buy recommendation is based on the following:
The group's solid capital and liquidity ratios are supportive of further balance sheet growth in FY 21.
Its superior operating efficiency remains positive even as it organically gains scale, with the cost/income ratio at 53% in Q1 21, the second lowest in our coverage (GTB retains no. 1 position at 42%).
The group's asset quality trends remain positive, as well as its loan recovery strategy and robust provisions coverage (highest in our tier 1 coverage at 114%).
The group's commitment to increasing retail banking penetration and having the highest stock of low-cost deposits (CASA: 94% vs 80% average for tier 1 coverage), should provide relief in terms of funding costs, and growing digital banking transaction volumes.
Zenith Bank is currently trading at 3.0x FY 21f PE and 0.56x tangible PB, compared to the average 3.2x FY 21f PE and 0.53x tangible PB for our Nigeria banks coverage.
Zenith Bank’s non-interest income was better than expected, growing 4% yoy. The performance of e-banking income (up 105% yoy) and account maintenance charges (up 35% yoy) were impressive, however trading and FX income dropped 44% yoy. On a qoq basis, it dropped 37%, on lower trading and FX revaluation gains compared to Q4 20.
Net interest income was up 2% yoy (up 12% qoq), on lower funding expenses associated with deposits (down 56% yoy). However, net interest margin decreased by 1.7ppts yoy to 6.0%.
The group’s loan impairment charges dropped 82% yoy, on the back of larger recoveries made in Q1 21. As a result, cost of risk decreased to 0.1%, from 0.5% in Q1 20.
NPL ratio improved slightly by 0.1ppts qoq to 4.2%. Provisions coverage also remained robust, growing 1.9ppts qoq to 114%, the highest in our tier 1 coverage.
The group’s operating expenses increased 6% yoy, on the back of higher regulatory costs (up 23% yoy), as personnel and admin expenses only grew by 2% yoy. As a result, cost/income ratio decreased marginally by 1.8ppts yoy to 53%.
Gross loan/customer deposits declined 2.1ppts qoq to 53%, as the 6% qoq growth in customer deposits outweighed the 2% qoq growth in gross loans.
Capital adequacy ratio dropped 1.5ppts qoq to 21.1% and liquidity ratio for the bank dropped 17.5ppt qoq to 70%. They both remain well above the regulatory thresholds of 15% and 30% respectively.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...