Fixed Income Analysis /
Nigeria

Zenith Bank: FY 19 review – Another stellar set of results

  • The issuer disclosed FY 19 net income of NGN209bn, generating a return on equity of almost 24%

  • Non-performing loans ratio improved, and both the Tier 1 and total capital ratios remain above 20%

  • We have a Hold recommendation on the Zenith Bank (ZENITH) 7.375% 2022 bond

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

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Tellimer Research
27 February 2020
Published byTellimer Research

We have a Hold recommendation on the Zenith Bank (ZENITH) 7.375% 2022 bond, which yields just over 4%. The issuer disclosed FY 19 net income of NGN209bn, generating a return on equity of almost 24%. Net income was also 9% higher than in 2018. Zenith Bank’s non-performing loans ratio improved, and both the Tier 1 and total capital ratios remain above 20% despite recording a significant increase in RWAs. Zenith Bank expects only modest loan growth this year – management guides to loan growth of 2% for FY 20, in line with the bank’s expectations for deposit growth. This reflects the outlook for economic growth, as well as expected loan repayments. While this loan growth target may appear somewhat disappointing, we note that margins are expected to remain relatively high, non-interest income is seen staying strong and Zenith Bank forecasts a FY 20 ROE of 24%. The key risk to this bank is ever-changing regulations – at end-19, mandatory reserves at the CBN included amounts set aside due to the LDR shortfall. As is well known, banks do not earn interest on these amounts. Notwithstanding this, with just US$107mn of the ZENITH 2022 bond left outstanding following a buyback in September 2019, we do not expect these results or the regulatory changes to-date to have a marked impact on valuations. 

Non-interest income drove revenue growth: Operating revenue of just under NGN500bn was 5% higher than in 2018. Derivatives-related losses narrowed yoy and Zenith Bank reported a significant rise in trading income – from both treasury bills and bonds. Net fee and commission income was also strong – this exceeded NGN100bn, driven by fees on electronic products, credit-related fees and foreign withdrawal charges. E-banking income was particularly strong, and Zenith Bank expects to maintain this solid growth in 2020. Lower yields on loans and other interest-bearing assets meant that net interest income fell 10% yoy to NGN267bn. Further margin compression is forecast this year – Zenith Bank guides to a net interest margin of 8%, down from 8.23% in 2019. This, and the modest loan growth forecast, suggests non-interest income growth may be even more important this year.

Cost/income ratio improved yoy: Operating expense of cNGN232bn was just 3% higher than in the previous year as rises in depreciation charges and in personnel costs were partly offset by lower administrative expenses. Other expenses, including fuel and maintenance, operating lease, travel and hotel expenses all fell yoy. On our calculations, Zenith Bank’s cost/income ratio was about 1ppt better than in 2018, at 46.4%. No significant change in this ratio is expected this year.

NPL ratio lower than at end-18: Total non-performing loans of NGN106bn were higher than at end-18. NPLs fell in sectors including agriculture, oil and gas and finance and insurance, but increased in real estate and construction, communication (due to the classification of one large exposure) and consumer credit. Total NPLs were down on the Sept 2019 level of more than NGN109bn. Zenith Bank’s NPL ratio was 4.3%, and coverage was almost 1.5x. The bank booked provisions of NGN24bn last year. While this was up 31% on the previous year, we note that the charge has been significantly higher in the past – it was NGN98bn in 2017.

No near-term liquidity concerns: Solid loan growth meant that the LDR increased to 54% from 49% a year earlier, on our calculations. Lending to general commerce, agriculture and oil and gas companies, as well as consumer credit, contributed most to yoy loan growth. Gross loans declined yoy in the businesses outside Nigeria. Management was keen to emphasise that underwriting standards have not been compromised in the drive to boost loans (to meet the minimum LDR requirement imposed by the regulator). Turning to deposits, yoy growth of 15% primarily reflected increases in domiciliary accounts (up 46% yoy) and savings deposits (up 25% yoy). According to the issuer, the bank-only LDR rose 70bps yoy, to 68.6%. However, the regulator-assessed ratio (which is loans-to-funding rather than loans-to-deposits) was just under 65% at the end of last year. As such, NGN78.8bn of the NGN680bn in reported mandatory reserve deposits at central banks relates to the LDR shortfall. The CBN is expected to re-assess compliance with this minimum requirement at the end of March, and Zenith Bank believes a refund may well be due. Cash and equivalents fell to NGN671bn from NGN947bn (cUS$1.8bn from cUS$2.6bn). We note that the bank redeemed a US$500mn eurobond in April 2019 and bought back c80% of the ZENITH 7.375% 2022 bond in September. Zenith Bank now has just US$107mn outstanding in the eurobond market. Management does not consider another buyback of this bond to be economical, given the small size. Thus, what is left of the bond could remain outstanding until the final maturity in 2022. Zenith Bank did not completely rule out returning to the eurobond market, but this will largely depend on the demand for foreign currency loans. 

Capitalisation remains a strength: The Tier 1 and total capital ratios were down yoy, at 20.4% and 21.7%, respectively, reflecting a significant rise in risk-weighted assets, which was itself driven by loan growth. We note that the ratio of loans to assets increased to 36% from 31% at the end of the previous year, and the RWA/total assets ratio rose to 39% from 34%. Zenith Bank’s equity/assets ratio was 14.8%, up from c20bps versus end-September 2019 and c90bps higher than at end-18.

Modest loan and deposit growth expected: Zenith Bank provided guidance for 2020 as part of the results disclosures. The bank expects loan growth and deposit growth of 2%. Management commented that the modest outlook for loan growth reflects the outlook for economic growth, as well as expected repayments. This also reflects forecast deposit growth. The net interest margin is seen falling to 8.00% from 8.23% even though the cost of funds is expected to stay flat yoy, at 3.00%. Zenith Bank also guides to a group loans/deposit ratio of 58%, capital adequacy ratio of 20% and liquidity ratio of 55%. The issuer forecasts a non-performing loans ratio of 4.2% and NPL coverage of 150%. Zenith Bank expects to generate a return on equity of 24% and a return on assets of 3.5% – both figures are marginally better than the issuer reported for 2019. We note that changes introduced in the Finance Act earlier this year are expected to reduce the tax burden at the bank – Zenith Bank guides to an effective tax rate of 12% this year, down from 14.2% in 2019.