March 1, 2022/CSL Research

Zenith Bank’s FY 2021 AUDITED numbers showed a 1.6% y/y growth in Interest Income (2.5% above our 2021 estimate). Q/q, however, Interest Income was up 13.2% in Q4 2021 compared with Q3 2021. The marginal y/y growth in Interest Income was mainly due to steep declines in interest on Placement with banks/discount houses, treasury bills and promissory notes in a relatively low yield environment. This was, however, mitigated by growth in interest income from loans and advances (up 16.5% y/y) while Net Loans were up 20.8% y/y. Interest Expense, on the other hand, declined by 11.8% y/y but was up 8.6% in Q4 relative to Q3, bringing cost of funds marginally higher to 1.5% for FY 2021 compared with 1.4% in 9M 2021, 1.3% in H1 2021 and 1.1% in Q1 2021. Cost of funds of 1.5% in FY 2021, however, compares favourably with 2.1% in the same period of 2020. The gradual growth in funding cost through 2021 reflects the uptick in interest expense on wholesale funds, which were mitigated by a high CASA ratio as term deposits made up only 7.0% of total Customer Deposits. Total Customer Deposits were up 21.2% y/y. Overall, Net Interest Margins (NIMs) was down to 6.7% for FY 2021 compared with 7.9% in December 2020.

In line with our estimates, Net Fee and Commission Income was up 31.0% y/y but down 16.2% in Q4 2021 compared with Q3 2021. The y/y growth was mainly on the back of a 38.4% y/y growth in fees on electronic products, a 42.8% y/y growth in account maintenance fees, and a 29.8% y/y growth in credit related fees. The bank must have significantly increased the volume of transactions across all channels, and we view this positively, while the growth in credit related fees reflects the relatively strong loan growth within the period.

FY 2021 Nm

Source: Company, CSL Research.

Other Income (Trading gains and Other Operating Income) was up 18.9% y/y, 32.4% above our estimate due to a significant growth in Q4. Q/q, Other Income grew 156.2%. The q/q steep rise was mainly due to a 144.8% growth in trading gains to N76.8bn in Q4 from N31.4bn in Q3 and a 246.1% growth in Other Income to N13.8bn in Q4 compared with N3.98bn in Q3.

Impairment charge was up 51.6% y/y to N59.9bn for 2021, bringing FY 2021 Cost of Risk (COR) to 1.9% compared with 1.5% for FY 2020 and our estimate of 1.3%. Impairment Charge rose steeply in Q4 2021, up 246% q/q (Q4 compared with Q3). We await the bank’s explanation for the steep rise in Impairment in Q4 2021. The bank’s reported Impairment Charge was higher than our estimate by 46.9%. With NPL ratio of 4.2% and coverage ratio of 114.4%, we do not see any near-term risk to the bank’s asset quality ratios, though we expect Impairment Charge to rise in 2022.

OPEX grew 13.1% y/y. The slightly lower y/y growth, when compared with a 14.2%y/y growth in Total Operating Income, led to a marginal improvement in Cost to Income Ratio (ex-provisions) to 46.0% for FY 2021 compared with 46.4% in December 2020. Q/q, OPEX was up 2.3%.

Overall, PBT grew 9.6% y/y to N280.4bn in FY 2021 while Net Profit grew 6.1% y/y due to a marginally higher tax charge to N244.6bn bringing FY 2021 ROAE to 20.4% compared with 22.4% for December 2020. Both Pre-tax profit and Net profit were ahead of our estimate by 17%.

The bank still rates well based on capital adequacy (CAR 21.0% down from 23.0% in December 2020), sustainable long-term dividend yield, and stable asset quality.

The bank’s management proposed a final dividend of N2.80/s, bringing the total FY 2021 dividend to N3.10/s compared with N3.00 for FY 2020. FY 2021 dividend yield comes to 11.4% based on yesterday’s closing price of N27.10/s.

We have a Buy recommendation on the stock with a target price target of N37.20/s. Current Price N27.10/s.