August 19, 2019/Cordros Report
Zenith Bank Plc.’s audited H1-19 result was recently released and was in line with our expectations, as non-funded income growth and operational efficiency drove profit expansion. Gross earnings growth was tepid, expanding moderately by 2.9% y/y, as non-funded income growth provided the only support. This led to a moderate expansion in PBT, as Opex expansion remained moderate despite regulatory-induced cost pressures. Finally, the bank proposed an interim dividend of NGN0.30/share, which translates to a yield of 1.81% based on the closing price on the 19th of August 2019 (NGN16.60).
The gross earnings recorded remains in line with our FY-19 estimate and would settle 1.30% y/y lower based on the current run rate. The top-line growth was primarily supported by the 23.86% y/y expansion in non-interest income, which was boosted by net fees and commissions (+33.62% y/y) and trading gains (+22.53% y/y) income growth. The growth in non-interest income is outpacing our FY-19 estimate, which at the current run-rate would settle 5.40% higher y/y.
On the other hand, interest income declined by 6.15% y/y, driven by weak risk asset creation and declining yields on fixed-income securities. Consequently, income from loans and advances to customers declined by 21.43% y/y, completely offsetting the 21.06% y/y growth in income from investment securities. Similarly, interest expense declined by 3.51% y/y, partly offsetting the impact of the declining interest income, however, net interest income still printed 7.43% y/y lower.
Operating expenses settled 1.08% y/y, a -6.30% deviation from our estimate, with the most pressure stemming from personnel expenses (+11.25% y/y). Despite the impact of the increased regulatory costs (AMCON levy and NDIC premium), Opex growth was muted given the management of ancillary costs i.e. cost on fuel and maintenance (-27.44% y/y), and corporate promotions (-56.44% y/y).
Consequent on the marginal growth in both operating income and Opex, the bank’s cost-to-income ratio settled at 53.2% (H1-18: 53.9%). This further translated to an expansion in profitability, as profit-before-tax settled 4.02% higher y/y, while profit-after-tax grew by 8.7% y/y, on account of an 11.03% decline in tax expense. This translated to Return on Average Equity and Return on Average Assets ratios of 21.74% and 3.00% respectively.
In our view, the bank’s macro-prudential ratios are above par, with only the non-performing loans ratio settling above the regulatory limit (5.3% relative to 5.0% statutory limit). All other ratios are settled well above regulatory minimums; Liquidity ratio (74.6% relative to 30.0%), Capital Adequacy (25.0% relative to 16.0%). We note that the bank’s current reported loans to deposit ratio (51.2%) is below the new minimum LDR of 60.0%. However, this does not seem to have been adjusted for the new weightings for the Retail, SMEs, Consumer credit and Mortgage segments. We will seek clarity here, as the financials do not hold enough information on exposures to these segments, save for Consumer Credit which is 1.93% of the gross loans exposure. Hence, we could not accurately recalculate the LDR.
Conference Details: The bank will have a teleconference call on Wednesday, August 21st, 2019 at 2 pm. The teleconference call facility can be accessed by dialing: (Nigeria) +23412775800; PIN: 89585887#; (South Africa) +27216724122; PIN: 89585887#; (United Kingdom) +442071943759; PIN: 89585887#; (United States) +1 6467224916; PIN: 89585887#.
Comment: The bank’s performance is in line with our expectations. We expect a move to align with the new LDR directive would impact profitability positively as interest income ramps up, however, we maintain our view that growing risk assets significantly over a short period would be counter-intuitive to sound risk management practices. Hence, we would expect upward pressure on non-performing loans. Our estimates are under review.