Equity Analysis /
Nigeria

Zenith Bank: Good start to the year; reiterate Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Contributors
    Rahul Shah
    Ayodeji Dawodu
    Tellimer Research
    18 April 2019
    Published by

    Q1 19 EPS rose 7% yoy to NGN1.60 and ROA improved slightly to 3.4% (up 0.1ppt), trending ahead of our full-year forecasts for an 8% yoy decline in EPS to NGN5.69 and ROA of 2.9%. A key driver of the performance was a yoy drop in gross funding costs, which in addition to higher interest income from treasury bills, drove the 23% yoy increase in net interest income. Other positives were higher net fee and commission income, lower impairment charges for credit losses, and a decline in general operating expenses. Headwinds included an expected decline in trading income and FX gains, which resulted in total revenues dipping slightly by 1% yoy. The reported NPL ratio fell to 4.9%, partly due to write-offs and recoveries, which also partly explains the 24% decline in the provisions balance. 

    Reiterate Buy with an unchanged TP of NGN40.00 and 106% ETR. Zenith’s Q1 performance built on the positive momentum from FY 18. Similar to GTB, Zenith also recorded strong e-banking revenue growth, which supported its top line and profitability. While the weak macroeconomic backdrop continues to constrain stronger loan volumes (gross loans fell by 4%), Zenith remains well positioned to benefit from any recovery given its robust CAR of 22.3% (fully adjusted for IFRS 9 and above the 16% threshold) and NPLs provisions coverage of c156%. Zenith is our top pick among Nigeria banks and trades at FY 20f P/B of 0.7x versus frontier peers at 1.3x.

    Weaker non-interest revenues (NIR) were expected, as trading and FX income dropped. However, the 35% decline in NIR was sharper than our 20% forecast for FY 19f. Trading income and FX gains were down 64% yoy, offsetting a 14% yoy increase in net fees and commissions, as fees on electronic products more than doubled and current account fees rose. 

    Operating expenses were down 4% yoy, which was encouraging, but the cost/income ratio only fell slightly to 50% (down 0.1ppt) due to the NIR compression. Corporate promotions and fuel and maintenance costs were much lower, outweighing higher AMCON charges and personnel expenses. 

    Decline in cost of funds continued to support net interest income. The 23% increase in net interest income was largely due to lower interest expense on customer deposits and borrowings, and higher interest income from treasury bills. Gross funding costs fell by c0.9ppts yoy, partly due to improvements in the deposit base as savings deposits rose by 28% yoy, which outweighed lower asset yields. Total deposits fell by a moderate 3% from end-FY 18 on lower current account deposits. Savings deposits continued to rise qoq (up 6%), which in addition to a slight dip in term deposits, kept the CASA ratio at 87%.