Zenith Bank Plc H1 2020: Weak q/q Performance but y/y Earnings Improve Marginally

September 12, 2020/InvestmentOne Report

·         Net interest income of N75.91billion, down 6.86%q/q , up 34.64%y/y

·         Non-interest income of N69.85billion, up 49.76%q/q, down 9.38%y/y.

·         Profit before tax of N55.34billion, down 5.87%q/q, up 1.75% y/y.

·         Profit after tax of N53.30billion, up 5.49%q/q, 0.58%y/y. 

Jump in Credit Loss Weighs in on Higher Treasury Bills Gains

Ebenezer Onyeagwu, Group Managing Director/Chief Executive of Zenith Bank Plc

Last week, Zenith bank released its audited H1/Q2 2020 result which showed a 5.87%q/q decline in PBT for Q2 2020. This was driven by the 10.24%q/q decline in Net Interest Income and the jump in loan impairment to N19.97billion from N3.95billion in Q1 2020 which offset the 49.76%q/q increase in Non-interest income. While we believe less appetite to grow loan book as well as low interest rate environment could have caused the decline in interest income, we highlight that the improvement in Non-interest income was due to the jump in mark to market gains on treasury bills (N50.88billion in Q2 2020 vs N14.82billion in Q1 2020). Net Interest Margin improved to 9.00% from 7.70% in Q1 2020. We further highlight that the bank’s margin was weaker than 9.74% recorded by GTB in the same period. Also, OPEX rose by 7.72%q/q due to increase in Personnel Expenses and other operating expenses.   

Higher NII Offsets the Impact of the Jump in Credit Loss

On a y/y basis, Net Interest Income (NII) jumped by 34.64% to N75.91billion while Non-interest income declined by 9.38%y/y to N69.85billion. The increase in NII was due to the improvement in loan book and Net Interest Margin while fall in Non-interest Income was due to the fall in net fees and commission. Resultantly, the bank’s Profit Before Provisions and OPEX rose by 9.22% y/y to N145.76billion.

As a result of the 4.48%y/y increase in OPEX, cost to income ratio rose by 110bpsy/y to 54.30% in at the end of Q2 2020. This is well above the bank’s 2020 guidance of 48% for cost to income ratio. In addition, this is still above GTB’s ratio of 43.16% in the same period. The bank’s cost of risk rose by 40bps y/y to 1.8% compared to GTB’s ratio of 0.41% as the jump in impairment increased cost of risk. As a result of the jump in NII which offset the impact of the rise in impairment (+71.60%y/y), PBT rose marginally by 1.75%y/y to N55.34billion in Q2 2020. 

Improvement in NII Supports Earnings

For H1 performance, the bank recorded a 2.19%y/y increase in PBT to N114.12billion. This was driven by the 10.24%y/y improvement in Net Interest Income and the 6.16%y/y rise in Non-interest Income which offset the 74.18%y/y jump in loan impairment and 7.11% increase in OPEX. Net Interest Margin improved to 9.00% from 8.60% in H1 2019 as cost of funds fell to 2.2% from 3.0% in H1 2019. Overall, ROE was down by 20bpsy/y to 21.5% while ROA was flat at 3.0%

Despite the increase in loan book, the bank’s asset quality deteriorated as its NPL ratio rose to 4.7% from 4.3% in FY 2019. This is above the bank’s NPL guidance of 4.20% in 2020 but still below regulatory benchmark of 5.0%. Regardless of the current CBN’s drive to boost credit to the real sector, we expect NPLs of most, if not all banks, to increase in 2020 given the current pandemic and its attendant effects on the economy particularly on sectors like Oil and Gas, Manufacturing, Construction, Trade & General, Real Estate, Education and Transportation sectors which account for about 60% of banking sector credit as at Q4 2019.  

H2 Outlook

Going forward, while we expect the bank to meet its conservative loan growth target of 2.0% given what the bank has done so far in 2020 (+14%), we expect the bank to focus on cost containment and risk management given the potential effects of the current pandemic which may continue to reflect on H2 2020 numbers albeit better than Q2. Nonetheless, we expect the bank’s LDR to be in line with the CBN guidance as its current LDR of 66.1% (Bank level) is well above the CBN target of 65%.

In the same vein, with the recent cut in interest rate on Savings account by the CBN (from 30% of MPR to 10% on MPR), we expect the bank’s Net Interest Margin to improve as cost of funds falls further. However, the impact may not be so much on the bank’s margin as Savings deposit only made up about 19.1% of the banks Deposit as at the end of H1 2020.

Similarly, the bank’s CAR of 20.0%, though weaker than 22.0% as at 31st December 2019,  is well above regulatory requirement of 15%. As such, the bank is still on a strong footing to weather the current storm.

Overall, while most banks have applied for loan restructuring with the CBN, we still think the current pandemic is a major risk to banks. However, we believe Zenith bank is one the quality names in the sector which should thrive as the bank remains resilient (efficiency and strong capital base) in the face of weak macroeconomic environment. 

 

 

 

ZENITH BANK PLC Q2 2020 (YE: DEC) (N millions)

 

 
 

Q2 2020

 

Q/Q

 

 

Y/Y

 

 

H1 2020

 

Y/Y

 

 

 

Interest Income

 

102,624

 

-10.24%

 

11.40%

 

216,954

 

1.10%

 

 

Interest Expense

 

-26,716

 

-18.62%

 

-25.26%

 

-59,545

 

-17.40%

 

 

Net Interest Income

 

75,908

 

-6.86%

 

34.64%

 

157,409

 

10.45%

 

 

Non-interest income

 

69,847

 

49.76%

 

-9.38%

 

116,486

 

6.16%

 

 

Profit before provisions

 

145,755

 

13.75%

 

9.22%

 

273,895

 

8.58%

 

 

Loan Impairment charges

 

-19,972

 

405.49%

 

71.60%

 

-23,923

 

74.18%

 

 

Total Opex

 

-70,447

 

7.72%

 

4.48%

 

-135,848

 

7.11%

 

 

PBT

 

55,336

 

-5.87%

 

1.75%

 

114,124

 

2.19%

 

 

Tax

 

-2,036

 

-75.36%

 

-87.06%

 

-10,298

 

-54.82%

 

 

Tax rate

 

 

3.68%

 

 

-1037bps

 

-2526bps

 

9.02%

 

 

-1139bps

 

 

 

PAT

 

53,300

 

5.49%

 

0.58%

 

103,826

 

16.81%

 

 

Source: Company financials, Investment One Financial Services Research  

H1 2020 BANKS COMPARISON SHEET

 

 

 

 

 

 

 

 

 

 

 

NGN billion (unless stated otherwise)

 

FBNH

 

GTB

 

ZENITH

 

ACCESS

 

UBA

 

Key Income Statement Figures

 

Gross Earnings

 

296.40

 

225.10

 

346.09

 

396.76

 

300.60

 

Net Interest Income

 

131.30

 

127.62

 

157.41

 

246.72

 

119.30

 

Non-interest Income

 

80.10

 

71.40

 

116.49

 

126.21

 

77.38

 

Total Expenses

 

139.20

 

83.30

 

135.85

 

174.29

 

132.13

 

Loan Impairment Charges

 

30.70

 

6.77

 

23.92

 

16.47

 

7.81

 

Profit Before Tax

 

41.40

 

109.71

 

114.12

 

74.31

 

57.13

 

Y/Y PBT Growth

 

 

14.30%

 

 

-5.25%

 

2.19%

 

 

1.84%

 

 

-18.71%

 

 

Dividend (Kobo per share)

 

nil

 

30

 

30

 

25

 

17

 

EPS (kobo per share)

 

272

 

332

 

330

 

173

 

124

 

Key Balance Sheet Figures

 

Total Assets

 

7,130

 

4,511

 

7,580

 

7,766

 

6,775

 

Total Liabilities

 

6,426

 

3,790

 

6,591

 

7,096

 

6,141

 

Total Equity

 

704

 

721

 

989

 

670

 

634

 

Key Ratios

 

Net Interest Margin

 

6.80%

 

9.74%

 

9.00%

 

4.90%

 

5.40%

 

Cost of Fund

 

2.80%

 

1.50%

 

2.20%

 

3.70%

 

N/A

 

Cost to Income

 

65.80%

 

43.16%

 

54.30%

 

65.80%

 

67.00%

 

NPL ratio

 

8.80%

 

 

6.80%

 

 

4.70%

 

4.40%

 

 

4.10%

 

Liquidity (bank level)

 

30.60%

 

43.15%

 

43.80%

 

44.70%

 

N/A

 

Cost of Risk

 

3.10%

 

0.41%

 

1.80%

 

N/A

 

0.70%

 

Capital adequacy ratio

 

16.50%

 

22.93%

 

20.00%

 

20.00%

 

24.90%

 

LDR

 

47.40%

 

56.19%

 

66.10%

 

59.10%

 

N/A

 

ROE

 

14.50%

 

26.78%

 

21.50%

 

19.10%

 

14.40%

 

ROA

 

1.50%

 

4.56%

 

3.00%

 

1.60%

 

1.42%

 

Source: Company financials, Investment One Financial Services Research

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