Culled—Proshare

August 29, 2019/Meristem

Non-interest Income Supports Gross Earnings Growth 

In H1:2019, Zenith bank recorded slow growth in gross earnings (+2.91%), compared to the corresponding period in the previous year. On a quarter-on-quarter basis, however, gross earnings increased by 13.38%. In the first half of the year, interest income dipped by 6.15%, bowing to pressures from a lower yield environment, however, a moderation in derivative losses and stronger non-interest income (+23.90%) provided the needed support to sustain growth in revenue. An improvement in Zenith Banks funding mix, coupled with a lower debt obligation was instrumental to the decline in interest expenses (-3.15%) and the moderation in the cost of funds to 3.0% from 3.4% in H1:2018. 

However, the impact of the low yield environment weakened the Net Interest Margin (NIM) which contracted to 8.60%. Although the bank recorded a higher Impairment charge (+41.31%), its ability to maintain a tight lid on operating expenses (-0.40%) was help in moderating the cost to income ratio by 71bpts to 53.18%. Thus, Zenith bank recorded 8.74% growth in PAT to NGN88.88bn. Given continued pressure from the yield environment, we lowered our growth forecast for interest income (+3.80), with more optimism on non-interest income (+20.91). Thus, we project that gross earnings will grow by 6.99% with PAT growing by 8.76% to NGN210.37bn for FY2019.

Retail Banking Drive Yields Positive Result

Having gained dominance in the corporate banking space, the bank is gunning for the retail segment of the market and its current strategy has begun yielding fruits. Through an increase in the customer base and improvements on electronic platforms, fees on electronic products grew by 168.69%, contributing 48.51% to fees and commission income which is an improvement from 24.12% recorded in the previous year. We expect the bank to deepen its presence in the retail market with innovative products along the value chain and we remain upbeat about its foray into this space, raising our growth expectation on its non-funded income.

Positioned for Meeting CBN’s Target Loan-to-Deposit Ratio

In the first half of the year, the bank grew its deposit base by 3.24%, but its loan book contracted by 3.20%. Nonetheless, the bank’s Loans-to-Deposits (LtD) ratio remains in good standing at 62.70%, above the 60% regulatory minimum. The group, however, has a LtD ratio of 51.20% but the focus remains on the bank ratios. Given its retail banking drive and the weighting on specific sector loans, we expect the bank to be well above the regulatory minimum and are confident in the ability of the bank to maintain this ratio in the near term.  

Interim Dividend Culture Maintained

Zenith bank maintained its interim dividend culture, announcing an interim dividend of NGN0.30 which implies a dividend yield of 1.85% on the day of declaration. We believe that the bank will continue to deliver on its promises which will help it maintain its dividend culture.

Recommendation 

Following our review of the bank’s performance, we revised our EPS forecast to NGN6.70 with an expected PE of 3.90x, resulting in Dec. 2019 target price of NGN26.13.