August 27, 2021/CSL Research

Zenith Bank’s H1 2021 AUDITED results showed a 6.0% y/y decline in Interest Income. Q/q however, Interest Income grew marginally, up 1.6% in Q2 2021 relative to Q1 2021. The y/y decline was mainly due to a steep decline in interest on Placement with banks/discount houses, treasury bills and promissory notes in a relatively low yield environment. Net Loans were up only 2.1% in H1 2021 from December 2020. Interest Expense on the other hand declined 26.1% y/y bringing cost of funds down to 1.3% in H1 2021 (up marginally from 1.1% in Q1 2021) compared with 2.2% in the same period of 2020. Interest Expense on time deposits and savings account declined the steepest, down 42.8% y/y and 42.4% y/y respectively. Customer Deposits were up 8.1% in June 2021 compared with December 2020. Overall, Net Interest Margins (NIMs) declined to 6.5% in June 2021 compared with 9.0% in June 2020.

Net Fee and Commission Income was up 42.3% y/y but declined significantly in Q2 compared with Q1 (down 48.3%). The y/y growth was mainly on the back of a 90.8% y/y growth in fees on electronic products (despite the regulatory cut to fees on electronic products implemented by CBN, effective January 2020), a 53.5% growth in account maintenance fees and a 49.6% y/y growth in Commissions on agency and collection services. The bank must have significantly increased volume of transactions across all channels, and we view this positively. The q/q decline was mainly due to 88.0% decline in credit related fees and 46.9% decline in fees on electronic products in Q2 relative to Q1. We await clarity on the reasons for the decline in E-banking fees at the bank’s conference call. Net loans were down marginally in H1 compared with Q1, which may have been responsible for the significant drop in credit related fees in Q2.

H1 2021 Nm

Source: Company, CSL Research.

Other Income (Trading Income and Other Operating Income) declined 4.7% y/y but significantly grew q/q (Q2 2021 compared with Q1 2021), up c.200%. The q/q growth was mainly due to trading gains of N49.4bn in Q2 compared with only N9.8bn in Q1. The bank reported gain on treasury bills FVTP of N47.7bn in H1 2021 compared with only N14.5bn in Treasury bill trading income reported in Q1 2021. The bank also reported net gain on other trading books of N12.7bn (of which of N39.9 billion relates to net gains on derivatives) in Q2 compared with N132m derivatives income in Q1.

Impairment charge was down 17.2% y/y to N19.8bn in H1 2021, bringing H1 2021 annualised Cost of Risk (COR) to 1.3% compared with 1.8% for H1 2020. Q/q however, Impairment Charge grew significantly, up 313% to N15.9bn in Q2. With NPL ratio of 4.5% and coverage ratio of 115.0%, we do not see any near-term risk to the bank’s asset quality ratios.

OPEX grew 10.3% y/y. The y/y growth coupled with only a marginal growth in total Operating Income (up 4.7% y/y) led to a deterioration in Cost to Income Ratio (ex-provisions) to 52.3% in H1 2021 compared with 49.6% in H1 2020. Q/q, OPEX was up 15.6%.

Overall, PBT grew 2.6% y/y to N117.1bn in H1 2021 while Net Profit grew 2.2% y/y due to a lower tax charge, to N106.1bn bringing H1 2021 annualised ROAE to 18.8% compared with 21.5% for December 2020.

The bank still rates well based on capital adequacy (CAR 22% down from 23.0% in December 2020), sustainable long-term dividend yield, and stable asset quality.

The management proposed an interim dividend of N0.30/s, same as was paid last year.

The bank’s management will hold a conference call on Wednesday Sept 1, 2021, at 3pm Lagos time to discuss the numbers.

We have a Buy recommendation on the stock with a target price target of N34.19/s. Current Price N24.40/s.