Earnings Report /
Nigeria

Zenith Bank: Q3 19 review: Another good set of results; reiterate Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tellimer Research
    23 October 2019
    Published by

    Zenith’s Q3 19 net income fell 1% yoy to NGN61.8bn, but was far ahead of our NGN41.9bn forecast. The earnings beat was largely due to: 1) a qoq uptick in net interest margin to 4.8% in Q3 from 3.8% in Q2 on our estimates (we forecast 4.2%); 2) a 24% yoy increase in non-core revenues to NGN26.8bn versus our NGN14.5bn forecast; and 3) a lower-than-expected effective tax rate of 4% versus our 15% forecast. Also, in line with the trend for peers, loans picked up sharply in Q3 by 13% qoq. However unlike those of peers, Zenith’s stage 3 loans increased qoq, by 23%. Compared with Q2 19, net income was up 54% due to lower operating expense and effective tax rate, as total income was lower qoq.

    Gross loan growth of 13% qoq is line with most peers, which have reported an 8% median growth. This trend, in addition to the impact of Zenith’s recent eurobond tender offer, drove its loan/funding ratio to 52% from 47% in H1 19 for Nigeria on our estimates (behind the Central Bank Nigeria’s revised 65% threshold). On the downside, an unexpected qoq increase in stage 3 loans led to a 0.8ppts qoq rise in the bad loan ratio to 9.3% and an 11ppts decline in provisions coverage to 79%. These ratios are weaker than our 7.0% and 106% forecasts for end-FY 19, respectively, and could result in a cost of risk above our 1.2% estimate for FY 19. 

    Maintain Buy with NGN37.00 TP and 131% ETR. With ROE of 23.8% for 9M 19 versus c21.4% for peers, strong capital ratios and high dividend yield (16.2% for FY 19f), we keep Zenith as our top Nigeria bank stock. It trades on FY 19f PB of 0.6x versus frontier peers at 1.0x.

    Our recently updated earnings forecasts and valuation estimates for Zenith and the rest of our Nigeria banks coverage can be found at this link: Nigeria Banks: Good fundamentals, but tricky technicals; Buy

    Table 1: Financial results summary 

    NGNmnQ3 19Q3 18yoyQ2 19qoq

    Net interest income (NII)

    72,112

    74,556

    -3%

    56,378

    28%

    Non-interest revenues

    47,025

    40,139

    17%

    77,074

    -39%

    Total income

    119,137

    114,695

    4%

    133,452

    -11%

    Total opex

    50,109

    50,128

    0%

    67,429

    -26%

    Pre-provision profit

    69,028

    64,567

    7%

    66,023

    5%

    Net attributable profit

    61,789

    62,189

    -1%

    38,672

    60%

    Net loans

    2,043,012

    1,824,724

    12%

    1,801,833

    13%

    Total deposits

    3,951,829

    3,275,547

    21%

    3,810,025

    4%

    NII / assets

    4.9%

    5.5%

     

    3.8%

     

    Cost / income

    42%

    44%

     

    51%

     

    ROE

    29.4%

    33.3%

     

    19.4%

     

    Stage 3 ratio

    9.3%

    10.7%

     

    8.5%

     

    Provisions coverage

    79%

    109%

     

    90%

     

    Source: Company accounts, Tellimer Research. * Based on stage 3 loans and excludes statutory reserves.