August 21, 2019/InvestmentOne Update

·         Net interest income of N56.4billion, down 34.5% q/q; down 7.4% y/y

·         Non-interest income of N77.1billion, up 136% q/q, up 17.3% y/y

·         Profit before tax of N54.4billion, down 5.1% q/q; up 4.0% y/y

·         Profit after tax of N38.6billion, down 23.1% q/q; up 8.7 y/y 

Zenith bank’s Q2/H1 2019 result was released on the NSE yesterday. PBT and PAT were down 5.1% and 23.06% q/q respectively (although up 4.0% and 8.7% y/y), as the combined effect of the 34.5% q/q drop in net interest income and the 13.5% q/q rise in total expenses erased the 1.3x q/q rise in non-interest income. The bank proposed a N0.30 interim dividend, the same as in H1 2018. 

On a y/y basis, net interest income was down 7.4% to N142billion, as net loans were flat YtD. Just as we have seen across most banking names, Zenith’s net interest margin was down 140bps y/y to 8.6% as asset yields continue to decline. However, the bank’s cost of funds was also down 40bps to 3.0%, with interest expense dropping 3.5%.

Another apparent trend was the increase in Non-Interest Income (NII), with Zenith’s NII rising 17.3% y/y to N109.7 billion, largely attributable to the 19.5% y/y rise in net fee and commission income and the 22.5% y/y boost in trading income. Resultantly, the bank’s profit before provisions inched up slightly by 1.9% y/y to N252 billion, tracking behind GT’s 3.6% rise, but better than FBNH’s 1.2% decline.

Source: Company financials, Investment One Financial Services Research

The bank was able to contain opex growth y/y, as cost to income appreciated 70bps to 53.2% in H1 2019, as total expenses were down 2.7% y/y, even as revenue growth was subdued. However, on a sequential basis, total expenses were up 13.5% on the back of an 11.7% q/q increase in personnel expenses. Management still has some work to do in achieving its target of 48.0% in FY 2019.

Nonetheless, the most concerning aspect was the deterioration in asset quality. The bank’s NPL ratio weakened by 30bps YtD to 5.3% – 45bps ahead of management’s FY 2019 guidance of 4.85%; with absolute NPLs rising 2.8% YtD and gross loans declining 3.0% YtD. Similarly, cost of risk rose 55bps to 1.4% due to the 41.3% y/y (4.5x q/q) rise in impairment charges to N13.7billion. However noteworthy, is that Zenith bank’s NPL ratio still compares favorably when juxtaposed against GTB (6.7%) and FBNH (14.5%).

We uphold our BUY recommendation and target price of N37.0, translating to an upside potential of 112% from its closing price of N17.40. Zenith is trading at 0.68x p/b multiple – a discount to its one-year forward p/b multiple of 1.25x on our numbers.