October 27, 2022/CSL Research

Zenith Bank’s 9M 2022 unaudited numbers showed 26.5% y/y growth in Interest Income grew to N390.8bn from N308.8bn driven mainly by growth in Net Loans and an improvement in pricing. Q/q (Q2 2022 compared with Q1 2022), Interest Income was up 29.2% q/q. Net Loans to Customers were up 28.5% y/y but up 15.6% in September relative to December 2021. The bank grew loans strongly in Q3. Interest Expense also grew strongly, up 45.5% y/y and 63.4% q/q (Q3 compared with Q2 2022). However, as expected for the tier 1 banks with a high proportion of low-cost funds, despite the increasing yield environment, the cost of funds increased only moderately to 1.7% in September 2022 from 1.4% in September 2022. Total Customer Deposits were up 33.1% y/y and 24.3% in September 2022 compared with December 2021. Overall, Net Interest Income grew 20.5% y/y and 16.6% q/q while Net Interest Margins (NIMs) deteriorated to 6.2% for 9M 2022 compared with 6.8% in September 2021 as funding costs grew faster than yields. The bank expects a recovery in NIMs as assets are repriced.

Net Fee and Commission Income was up 27.8% y/y driven mainly by growth in account maintenance fees (up 16.4%y/y), fees on electronic products (up 50.3% y/y), foreign currency transaction fees and commission (up 142.1y/y), foreign withdrawal charges (up 39.3% y/y) and commission on letters of credit (up 24.2%y/y). Q/q, Net Fee and Commission was up 15.0% in Q3 2022 compared with Q2 2022.

9M 2022 Nm

Source: Company, CSL Research.

Other Income (Trading gains and Other Operating Income) was down 2.2% y/y and declined significantly in Q3 compared with Q2, down 55.0 q/q. The q/q decline was mainly due to an 88.1% decline in trading gains in Q3 compared with Q2. The impact was however cushioned by N17.4bn in revaluation gains reported in Q3.

Impairment charge was up 28.8% y/y to N37.1bn in 9M 2022 from N28.8bn in the same period of 2021, bringing 9M 2022 annualised Cost of Risk (COR) to 1.3% same as was reported for 9M 2021. With NPL ratio of 4.4% and coverage ratio of 99.6% (down from 114.4% in December 2021), we do not see any near-term risk to the bank’s asset quality ratios.

OPEX grew 16.6% y/y. The slightly higher y/y growth in Opex when compared with a 15.8%y/y growth in Total Operating Income led to a marginal deterioration in Cost to Income Ratio (ex-provisions) to 51.6% for 9M 2022 compared with 51.2% in 9M 2021.

Overall, PBT grew 12.6% y/y to N202.5bn in 9M 2022 while Net Profit grew 8.6% y/y to N174.3bn bringing 9M 2022 annualised ROAE to 18.0% compared with 20.4% for December 2021 and 18.6% for 9M 2021.

The bank reports Capital adequacy ratio (CAR) of 19.1%.

We have a Buy recommendation on the stock with a target price target of N37.20/s. Current Price N20.10/s.