February 26, 2021/InvestmentOne Report

·         Net interest income of N74.50billion, up 9.94%q/q , 42.17%y/y

·         Non-interest income of N78.26billion, up 37.29%q/q, 3.84%y/y.

·         Profit before tax of N78.58billion, up 24.41%q/q, 17.08% y/y.

·         Profit after tax of N71.25billion, up 28.40%q/q, 22.59%y/y.

FX Revaluation Gain Offsets the jump in Credit Losses

Recently, Zenith bank released its audited Q4/FY 2020 result which showed a 24.41%q/q improvement in PBT for Q4 2020. This was driven by a 9.94%q/q increase in Net Interest Income (NII) and 37.29%q/q rise in Non-interest Income which offset the jump in Impairment charges to N14.43billion from N1.18billion in Q3 2020. The improvement in NII was driven by an increase in net loan (+19%YTD) as Net Interest Margin fell to 7.9% from 8.3% and 8.2% in Q3 2020 and FY 2019 respectively, in line with the direction of interest rates in 2020. The jump in Non-interest income was driven by other income on the back of foreign currency revaluation gain of N23billion from a revaluation loss of N1billion in Q3 2020. This may not be unconnected to the devaluation embarked upon by the CBN (Naira lost 13% at the IEFX window in 2020) which is favourable to Zenith’s net positive FX position. Income from fees and commission fell by 21.12%q/q to N20.21billion. The increase in loan impairment may not be unconnected to weak macroeconomic condition which may have had negative impact on the bank’s loan book. 

Decent NII Drives y/y Performance

On a y/y basis, Net Interest Income (NII) jumped by 42.17%y/y to N74.50billion and Non-interest income rose by 3.84%y/y to N78.25billion. As a result of the improvement in NII, Profit Before Provisions rose by 19.56%y/y to N152.76 billion. Despite the 8.88% increase in OPEX and the jump in Loan impairment charges (N14.43billion in Q4 2020 vs N5.78billion in Q4 2019), PBT rose by 17.08% to N78.58billion in Q4 2020 on the back of the improvement in NII. 

Impressive FY result

For FY 2020 performance, the bank recorded a 5.17% increase in PBT to N255.86billion. This was driven by the 1.26%y/y improvement in Net Interest Income and the 12.23%y/y rise in Non-interest Income which offset the 64.51%y/y jump in loan impairment and 10.44% increase in OPEX. The improvement in NII was due to the rise in the bank’s loan book as Net Interest Margin declined to 7.90% from 8.20% in FY 2019. While asset yield remained weak, fall in cost of funds to 2.10% from 3.00% in FY 2019 reduced the impact of lower asset yield on margin. OPEX rose by 10.44% on the back of the increase in the bank’s expenses on information technology due to the improvement in its online transaction volume in 2020.

As a result of the increase in OPEX, cost to income ratio rose by 120bpsy/y to 50% at the end of FY 2020. This is above the bank’s 2020 guidance of 48% for cost to income ratio. The bank’s cost of risk rose by 40bps y/y to 1.5% due to the jump in impairment charges. Overall, ROE was down by 140bps to 22.4% and ROA fell by 30bps to 3.1% due to the stronger growth in capital base and overall asset.

Despite the improvement in the bank’s loan book, NPL ratio remained unchanged at 4.29%. This is still above the bank’s NPL guidance of 4.20% in 2020 but still below regulatory benchmark of 5.0%. 

Outlook

Going forward, we expect NPLs of most, if not all banks, to increase in 2021 as the effects of the current pandemic linger.  While we expect Zenith Bank to focus on cost containment and risk management given the potential effects of the current pandemic, we believe CBN’s loan restructuring programme should reduce the impact of the pandemic on banks’ asset quality.

Nonetheless, we expect the bank’s LDR to be in line with the CBN guidance as its current LDR of 64.5% (Bank level) is just in line with the CBN’s target of 65%.

With the recent increase in interest rates, we expect the bank’s Net Interest Margin to improve in 2021 as asset yields increase. Similarly, the bank’s CAR of 23%, 100bps higher than 2019 level, is well above regulatory requirement of 15%. As such, the bank is still on a strong footing to weather the current storm.

We are uncertain that the bank can still maintain the same income from FX revaluation gain (N43billion in 2020 vs N11billion in 2019) in 2021. While we expect another devaluation in the near term, we do not see the same size of devaluation in 2021. However, we believe 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. In the same vein, the bank’s share remains one of the names with attractive dividend yield (currently above 10%) which is better than current return on 1yr tbill.

Source: Company financials, Investment One Financial Services Research

Source: Company financials, Investment One Financial Services Research