February 21, 2019/InvestmentOne Report

• Net interest income of N67.1billion, down 10.0% q/q; up 18.7% y/y
• Non-interest income of N44.4billion, up 5.7% q/q, down 52.5% y/y
• Profit before tax of N64.4billion, up 7.4% q/q; up 37.7% y/y
• Profit after tax of N49.3billion, down 21.1% q/q; up 10.5% y/y 

Zenith Bank published its Q4 2018 results on Tuesday, being the first lender to release its scorecard in the current earnings season. It was a fairly decent performance q/q, with PBT at N64.4billion, up 7.4% q/q. The improved PBT performance came in on the back of 12.6% and 17.1% q/q decline in impairment charges and opex to N4.0billion and N43.1billion respectively.  

However, PAT came in 21.3% lower q/q at N49.3billion, largely attributable to a higher effective tax rate (23.5% in Q4 2018 versus a tax gain in Q3 2018). 

Topline Performance 

As expected with the overall condition of the economy and the unwillingness to lend to the private sector, Zenith Bank posted a 10.0% q/q decline in net interest income to N67.1billion, despite the 5.4% decline in interest expense and moderation in Cost of Funds (CoF) by 20bps q/q in Q4 2018. This was a reflection of a declining loan book even as yields on debt instruments went up in Q4 2018. Consequently, interest income from loans was down 12.6% q/q 

In contrast, non-interest income was up 5.7% q/q to N44.4billion as trading income rose 69.1% q/q to N27.3billion – we suspect that this was possibly as a result of further revaluation gains and higher interest rates witnessed during the quarter. 

On a FY basis, notwithstanding the lower yield environment witnessed in 2018 compared to 2017, we saw a 14.6% y/y increase in net interest income to N295.6billion, due to the 33.3% y/y decrease in interest expense as CoF declined 210bps to 3.1%. The growth in net interest income occurred despite the 13.0% decline in loan book to N1.8 trillion and flat Net Interest Margin (NIM) at 8.9% in FY 18. 

Comparably, non-interest income deteriorated by 31.6% y/y to c.N180.0billion, attributable to the 49.2% y/y decline in trading income to N80.2billion. 

Lower Impairments and Effective Cost Control Lift Bottom line 

Reflective of improvements in asset quality were the 12.6% q/q and 81.3% y/y waning in impairment charges to N4.0billion and 18.4billion respectively. This is also supported by the moderation in Cost of Risk (CoR) to 0.9% in FY 18 from 4.3% in FY 17. 

The bank’s Non-Performing Loans ratio (NPL) was however up by 28bps y/y to 4.98% but largely due to a decline in loan book. As stated earlier, net loans were down 13.0% y/y and thus offset the 5.1% reduction in absolute NPLs to N100.5billion, leading to the increase in NPL ratio.  

Furthermore, we commend management’s efforts in curtailing costs, as the bank’s total expenses were down 17.1% q/q but flat y/y. However, cost-to-income was up 450bps y/y to 47.4%, but this was a result of the 15.4% y/y decline in gross earnings.  

The aforementioned were the major factors responsible for the 16.2% and 11.3% y/y increases in PBT and PAT to N231.7billion and N193.4billion respectively.  

Overall, Zenith Bank’s results are a testament to its resilience as the bank continues to deliver on its laid out goals, beating its outlined FY 18 PBT and PAT of N215.1billion and N182.7billion respectively. The bank also reported an ROAE of 23.8%, up 90bps y/y and a robust CAR of 25% in FY 18. Its commitment to improving profitability by focusing on cheaper funding is also seen to bear fruits, as customer deposits were up 7.0% y/y – supported by low cost deposits (savings deposits up 28% y/y) leading to the decline in CoF mentioned earlier.  

Finally, the bank declared a final dividend of N2.5k (Closure date: 8th March 2019), denoting a total FY18 dividend of NGN2.80 (interim: N0.30k). This implies a total dividend yield of 11% (versus 7.9% for FY 17) based on yesterday’s closing price of N25.4k and an adjusted (for interim dividend) yield of 10%. 

Going forward, we reiterate our stance on the banks’ earnings coming under pressure in 2019 as a result of its inability to grow its loan book aggressively as the economy continues to underperform, and trading income might be lower albeit subject to an upside risk of currency devaluation.  

However, we believe that the bank, may be open to more private sector lending in 2019. Management expects higher interest income to boost earnings as it plans on increasing focus on consumer loans as the economy continues to show signs of improved recovery, with GDP growth going up 1.93% in FY 18 versus 0.82% in FY 17. The bank also stated that it would seek to take advantage of the Differentiated Cash Reserve Requirement (DCRR) scheme, under the Real Sector Support Facility Program, we project a FY2019E loan book growth of 3% and our sustainable ROE of 21%. 

Source: Company financials, Investment One Financial Services Research

Zenith Bank Plc FY2018 Conference Call

Zenith Bank Plc (Bloomberg: ZENITHBA : NL) will have a teleconference call today, February 21, 2019 at 3pm Lagos Time (2pm London/ 4pm Johannesburg/ 10am New York) with its senior management to announce Zenith Bank Plc.’s audited financial results for the year ended 31 December, 2018. There will be an opportunity at the end of the call for management to take questions from investors and analysts.

Please click here to access the 2018 Full Year Group Financial Results.