Earnings Report /
Nigeria

Zenith Bank: FY 19 review – Strong non-interest income supports earnings growth; Buy

    Nkemdilim Nwadialor
    Nkemdilim Nwadialor

    Equity Research Analyst, Financials

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    Tellimer Research
    21 February 2020
    Published byTellimer Research

    Zenith bank reported FY 19 net profit to shareholders of NGN209bn, up 8% yoy and 16% above our FY 19 forecast of NGN180bn. The positive performance was mainly driven by higher non-interest income (up 29% yoy) and lower tax charges (down 10% yoy). Net interest margin remained flat at 5.1%, although better than our forecast of 4.6%, which could be attributed to lower yields on investment securities.

    We reiterate our Buy recommendation on Zenith with a TP of NGN37 and ETR of 103%. The bank's ROE for FY 19 came in at 23.8% versus our forecast of 20.9%. Coupled with strong capital ratios (23.1%) and high dividend yield (12.9%), Zenith is one of our top Nigerian banking stocks. Zenith is trading at 0.6x 2020f PB versus frontier peers at 1.0x. 

    Key positives

    • Revenues rose by 5% yoy, ahead of our 2% forecast, driven by higher fee and trading income.
    • The cost/income ratio fell to 46% from 47%.
    • Effective tax rate came in much lower than expected at 14% versus our expected 17%.
    • Gross loans picked up by 21% qoq, which might be representative of the increased drive to retail lending – as consumer credit picked up by 96% yoy, (quarterly figures not disclosed) following the central bank imposing a 65% LDR threshold
    • The bank’s asset quality improved by 2ppts qoq with NPL ratio declining to 6.8% and provisions coverage increasing to 93% (compared with our FY 19 forecasts of 7% and 106%, respectively). 

    Key Negatives

    • Net interest income was down by 10% yoy, due to lower yields on investment securities.
    • Despite an impressive qoq loan growth, Zenith’s loan/funding ratio currently stands at 50%, which translates to a 15ppts shortfall of the 65% LDR minimum threshold. If the bank does not meet the threshold by the 31 March 2020 deadline, it could see an additional NGN314bn (5%) of assets being sterilised, following the initial NGN136bn penalty in October 2019.
    Table 1: Financial results summary
     FY 19FY 18yoy9M 19qoq

    Net interest income

    267,031

    295,594

    -10%

     214,627 

    24%

    non-interest income

     232,120 

     179,963 

    29%

     156,756 

    48%

    total revenue

     499,151 

     475,557 

    5%

     371,383 

    34%

    Total operating expenses

     231,825 

     225,500 

    3%

     176,941 

    31%

    Pre provision income

     267,326 

     250,057 

    7%

     194,442 

    37%

    Net attributable income

     208,693 

    193147

    8%

     150,601 

    39%

    Net loans

    2,305,565 

     1,823,111 

    26%

    2,043,012

    13%

    Total deposits 

    4,262,289 

     3,690,295 

    15%

    3,951,829

    8%

    NII/assets

    5.1%

    5.1%

     

    4.90%

     

    Cost/income

    46%

    47%

     

    42%

     

    ROE

    28.3%

    23.8%

     

    29.40%

     

    NPL ratio

    6.8%

    9.0%

     

    9.30%

     

    Provisions coverage 

    93%

    106%

     

    79%

     

    Source: Tellimer Research, company reports