February 25, 2020/InvestmentOne Report

·         Net interest income of N267billion, down 9.66% y/y

·         Non-interest income of N232billion, up 28.98% y/y

·         Profit before tax of N243billion, up 5.01% y/y

·         Profit after tax of N208billion, up 7.97y/y   

Last Friday, Zenith bank released Q4 2019 result which showed a 2.59%q/q (down 2.4%y/y) decline PBT. This was driven by a lower net interest income (down 27.3%q/q) as the significant fall in interest rate weighed in on earnings. Similarly, we believe the drive to boost credit growth could have made the bank to revise its interest rate downward in order to drive new loans. However, Non-Interest Income (NII) jumped 60.0% q/q to N71billion in Q4 2019 as trading income on Treasury bills rose by 41%q/q to N34billion in Q4 2019. This was expected as the CBN’s policy on restriction of local investors from participating in OMO market led to a significant buy interest in the secondary tbills market. Nonetheless, this was not sufficient to offset the impact of the fall in net interest income on earnings during the quarter.  

On a full year basis, net interest income was down 21.9% to N267billion despite the 26.5%y/y jump in net loans in 2019. Similarly to the trend in banking sector in 2019, Zenith’s NIM was down 129bps y/y to 6.17% as asset yields continue to decline. However, the bank’s cost of funds was also down 8bps to 3.08%, with interest expense dropping to 3.0% from 3.6% as higher liquidity supported lower interest rate in 2019.

On the flip side, NII jumped 35.8% y/y to N179.9 billion, largely attributable to the 22.4% y/y rise in net fee and commission income and the 46.9% y/y boost in trading income. Resultantly, the bank’s profit before provisions and OPEX rose by 5.0% y/y to N499 billion.  

Despite a 2.8% increase in OPEX, cost to income ratio fell by 50bps to 48.8% in FY 2019 as gross earnings improved faster. As such, the bank was able to meet its 2019 cost to income target of 48%.

On a positive note, absolute NPL was largely contained growing marginally by 5.3% in FY 2019. While we did not expect NPL ratio to jump on the back of CBN’s directive on LDR target, we believe the impact of the growth in loan on NPL may reflect on 2020 and 2021 numbers. As a result of the growth in Loan book (26.5%y/y), NPL ratio declined to 4.30% better than 4.85% target set by the bank. However, LDR for the group stood at 54.1% while LDR for bank stood 64.22% close to CBN target of 65%. Cost of risk was somewhat flat at 1.1% (vs Management target of 1.0%) up from 0.9% in 2018 due to the 30.81% y/y rise in impairment charges to N24billion. The bank proposed a final dividend of N2.50, the same as in FY 2018.   

Going forward, while we think the regulatory uncertainty is the major risk to banks, we believe Zenith bank is one the quality names in the sector which should thrive as the bank remains resilience in the face of weak macroeconomic environment. Although, we expect low interest rate environment to help the bank to reduce its cost of funds and by extension improve its NIM in 2020, we think recent downward review of fees and commission by CBN may weigh in on NII in the near term.

Sources: Company financials, Investment One Research

Sources: Company financials, Investment One Research