May 11, 2020/InvestmentOne Report
Net interest income of N81.50billion, up 33.3%q/q , down -5.4%y/y
· Non-interest income of N46.64billion, down -39.9%q/q , up 42.8%y/y.
· Profit before tax of N58.79billion, down -12.4%q/q , up 2.6% y/y.
· Profit after tax of N50.53billion, down -13.1%y/y , up 0.6%y/y.
Weak Non-interest Income Drags Earnings down
Recently, Zenith bank released its unaudited Q1 2020 result which showed a 12.4%q/q decline PBT. This was driven by the 39.9%q/q decline in Non-interest income and 19.2%q/q increase in OPEX which offset the 33.3%q/q increase in Net Interest Income. While we believe growth in the bank’s loan book (11%ytd) could have caused the increase in interest income as interest rates remained compressed, we believe the recent downward review of bank charges on online transaction by the CBN could have accounted for the weakness in Non-interest income.
Similarly, trading income fell by 69.6%q/q as sell offs in fixed income space could have caused the decline in trading position. Net Interest Margin remained under pressure as it fell to 7.7% from 8.23% and 8.9% in FY 2019 and Q1 2019 respectively. We further highlight that the bank’s margin was weaker than 9.89% recorded by GTB in the same period. OPEX rose by 19.2%q/q as the bank recorded AMCON charges of N14.45billion in Q1 2020 compared to zero record in Q4 2019.
Increase in OPEX Puts Pressure on Cost to Income ratio
On a y/y basis, Net Interest Income was down by 5.4% to N81.50billion while Non-interest income jumped 42.8%y/y to N46.64billion. Resultantly, the bank’s Profit Before Provisions and OPEX rose by 7.9% y/y to N128.14billion.
As a result of the 10.10%y/y increase in OPEX, cost to income ratio rose by 180bpsy/y to 57.20% in Q1 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 40.6% but largely in line with tier 1 banks average in the same period. The bank’s cost of risk rose 20bps y/y to 0.6% compared to GTB’s ratio of 0.08%. As a result of the jump in OPEX, PBT only rose marginally by 2.6%y/y to N58.79billion in Q1 2020.
Loan book Rises further but Asset Quality Deteriorates
Despite the increase in loan book, the bank’s asset quality deteriorated as its NPL rose to 4.6% from 4.3% in FY 2019. This is above the bank’s NPL guidance of 4.20% in 2020. 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 oil price and Oil & Gas sector. We highlight that overall banking sector loan to Upstream Oil & Gas was around 19% while Zenith bank’s exposure to upstream oil and gas was 14.6% (of its loan book) as at December 2019. 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, we expect the bank to focus on cost containment and risk management given the potential effects of the current pandemic which may start to reflect in banks’ numbers from Q2 2020. As such, we do not expect the bank’s current LDR of 61.8% to reach the CBN’s guidance of 65% by the end of 2020.
Gloomy Outlook but Zenith Remains Resilient
However, with the recent devaluation, we see potential extra earnings for Zenith Bank given its net positive position in major foreign currencies (Net Positive FCY of N698billion based on our estimate from its FY 2019 result). This is better than other tier 1 players based on FY 2019 numbers. Similarly, we think the bank’s CAR of 19.6% which is well above regulatory requirement of 16% places it on a strong footing to weather the looming storm.
Overall, while we believe the current pandemic is a major risk to banks, we think 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 Q1 2020 (YE: DEC) (N millions) | |||||
Q1 2020 | Q/Q
| Y/Y
| |||
Interest Income | 114,330 | 11.7%
| -6.7%
| ||
Interest Expense | -32,829 | -20.4%
| -9.7%
| ||
Net Interest Income | 81,501 | 33.3%
| -5.4%
| ||
Non-interest income | 46,639 | -39.9%
| 42.8%
| ||
Profit before provisions | 128,140 | -7.6%
| 7.9%
| ||
Loan Impairment charges | -3,951 | -31.6%
| 88.5%
| ||
Total Opex | -65,401 | 19.2%
| 10.1%
| ||
PBT | 58,788 | -12.4%
| 2.6%
| ||
Tax | -8,262 | -8.1%
| 17.0%
| ||
Tax rate
| 14.1%
| 253bps
| 173bps
| ||
PAT | 50,526 | -13.1%
| 0.6%
| ||
Source: Company financials, Investment One Financial Services Research
Q1 2020 BANKS COMPARISON SHEET |
|
|
|
|
| |
NGN billion (unless stated otherwise) | GTB | ZENITH | ACCESS | UBA | FBNH | |
Key Income Statement Figures | Gross Earnings | 112.86 | 166.81 | 209.80 | 147.17 | 159.70 |
Net Interest Income | 64.30 | 81.50 | 72.21 | 65.42 | 60.30 | |
Non-interest Income | 35.80 | 46.64 | 77.93 | 28.53 | 49.70 | |
Total Expenses | 39.80 | 65.40 | 90.32 | 58.65 | 71.60 | |
Loan Impairment Charges | 1.22 | 3.95 | 8.58 | 2.64 | 9.70 | |
Profit Before Tax | 58.20 | 58.79 | 46.29 | 32.73 | 28.70 | |
Y/Y PBT Growth
| 1.17% | 2.60%
| 2.60%
| 8.50%
| 61.50%
| |
Dividend (Kobo per share) | nil | nil | nil | nil | nil | |
EPS (kobo per share) | 1.77 | 1.61 | 1.21 | 0.83 | 0.69 | |
Key Balance Sheet Figures | Total Assets | 4,057 | 7,128 | 7,281 | 6,351 | 7,023 |
Total Liabilities | 3,396 | 6,202 | 6,645 | 5,738 | 6,343 | |
Total Equity | 661 | 926 | 636 | 613 | 680 | |
Key Ratios | Net Interest Margin | 9.89% | 7.70% | 5.90% | 6.30% | 6.30% |
Cost of Fund | 1.50% | 2.60% | 3.80% | 3.30% | 3.30% | |
Cost to Income | 40.59% | 52.70% | 62.20% | 62.40% | 65.10% | |
NPL ratio | 5.95%
| 4.60% | 5.50%
| N/A | 9.20%
| |
Liquidity (bank level) | 45.59% | 41.80% | 44.60% | N/A | 30.10% | |
Cost of Risk | 0.30% | 0.60% | 1.20% | 0.50% | 1.90% | |
Capital adequacy ratio | 23.52% | 19.60% | 20.90% | N/A | 15.30% | |
ROE | 29.70% | 21.60% | 26.30% | 19.80% | 15.30% | |
ROA | 5.12% | 3.00% | 2.30% | 1.90% | 1.60% | |
Sources: Company financials, Investment One Research
