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.
| FY 19 | FY 18 | yoy | 9M 19 | qoq | |
|---|---|---|---|---|---|
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% |
|