September 10, 2020/United Capital Report
Earlier, Zenith Bank Plc (“ZENITH”) released its H1-2020 audited results, which showed a 4.4%y/y growth in Gross Earnings (GE) to N346.1bn. Also, PBT and PAT rose 2.2% and 16.5% to N114.2bn and N103.8bn while Loans as well as Deposits expanded by over 15.0% apiece to N3.5tn and N4.9tn, respectively. We update our estimates and we review our expectations below.
80bps reduction in CoF bolsters net interest income: ZENITH’s GE growth is commendable amid resilient interest and non-interest income growth during the period. Notably, interest income growth was muted, up 1.1%y/y to N217.0bn despite pressure on asset yields. Nonetheless, the resilient performance is traceable to the faster than expected growth in loans as well as a 31.0% surge in investment securities to N774.5bn, which offset pressure on yields. Elsewhere, interest expense slumped 17.4% to N59.5bn (translating into 80bps drop in Cost-of-Funds at 2.2%) and enough to bolster Net Interest Income by 10.0% to N157.4bn. As such, Net-Interest Margin improved from 8.6% to 9.0%. Meanwhile, Non-Interest Income (NII) sustained uptrend, rising 6.0% to N116.5bn. Notably, electronic banking fee tumbled from N27.0bn to N8.9bn amid regulatory changes and reduced transaction volumes due to the lockdown. However, this was offset by a surge in foreign currency gain and trading income, to keep NII afloat.
Impairment charges printed a 74.2% increase, much in line with industry trend, driving Cost of Risk (COR) from 1.4% in prior period to 1.8%. OPEX came in 7.0% higher to N1135.8bn, driven mainly by AMCON, NDIC (due to deposit expansion), Fuel & Maintenance and ICT related expenses. Thus, Cost to Income ratio (CIR) increased slightly to 54.3% (vs. 53.2% in prior period). Accordingly, the profit margins remained broadly stable as PBT came in at N114.1bn. Thanks to a 9.0% effective tax rate (vs. 20.4% in prior period) PAT jumped 16.8% to N103.8bn, with Net margin at 30.0% while 12month trailing ROE settled at 23.2%.
Sterilized cash, accounts for 20% of total assets: Much in line with observation amongst peers, ZENITH’s cash and balances with the CBN jumped 82.3% to N1.71tn, of which over N1.4tn or 87% represents mandatory and special reserves deposits with the CBN. This is unsurprising as most operators continue to insist that effective CRR ranges from 50% to +100% amid the apex banks heterodox policy mix vis-à-vis stringent LDR requirement. Notably, the Group LDR and Liquidity ratio of 57.1% and 50% reflects cautious approach to risk assets creation as well as huge sterilized reserved with the CBN. Nevertheless, asset quality concerns appear to be under control with NPL at 4.7% (vs. 5.0% guideline) with a coverage ratio of 132.0%. But we note the 200bps decline in Capital Adequacy Ratio (CAR) to 20% which is still well above the regulatory minimum of 15%/16%.
Stable cost profile and profit margins; restates a BUY rating: Save for increased country risk premium, we retain our valuation assumptions for ZENITH, buoyed by efficient cost-to-income ratio, robust balance sheet position, earnings stability, resilient margins and dividend consistency. For context, we expect PAT to top N200.0bn again in 2020, consolidating its industry position. Despite asset quality concern across the industry, we think ZENITH earning stability can more than compensate for pressure on CAR. On account of the higher risk premium, we revised our TP to N22.0/share with a 34.0% upside potential compared to current price. The bank trades at a P/B ratio of 0.5x, less than 1.0x for GUARANTY. Accordingly, we maintain a BUY rating on the ticker.
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