Zenith Bank Earnings Update 9M-19: Rapidly driving e-banking volumes


Zenith Bank Plc (“ZENITH”) released its 9M-19 results earlier, showing a 3.5%y/y growth in Gross Earnings (GE) to N491.3bn. Also, PBT and PAT increased by 5.3% and 4.5% to N176.2bn and N150.7bn respectively. Expansion in loan book (at 9.2% to N2.7tn) was faster than Customer deposits growth, which rose 7.1% to N3.95trn. We update our estimates for the bank and we review our expectations below.

Electronic Banking fee up 100% in 12 months: ZENITH’s GE growth was weak at 3.5%y/y to N491.3bn, no thanks to interest income which fell 5.1%y/y to N321.9bn amid lower earnings yield. Although net loans and advances grew 9.2%YTD, interest income on loans fell 18.2% to N175.2bn while interest income from other funding sources added 17.4%. Elsewhere, interest expense fell 2.9% to N107.3bn (which translates into a lower Cost-of-Funds at 2.95%) but was not enough to halt a 6.1% decline in Net Interest Income to N214.6bn. As such, Net-Interest Margin declined from 9.0% to 8.7%. Contrary to the poor outing for Interest Income, Non-Interest Income (NII) rebounded strongly in 2019, surging 21.8% to N156.8bn amid solid inflow from electronic banking fee which doubled to N35.3bn vs. N17.7bn. Impairment charges also printed a 27.3% increase, driving Cost of Risk (COR) to 1.2% from 0.9% in the prior period.

In terms of Operating Expenses (OPEX), ZENITH’s was able to keep OPEX at bay, rising 0.8% to N176.9bn. Thus, the Cost to Income ratio (CIR) slowed to 50.1% (vs. 51.2% in the prior period). Accordingly, the profit margins remained very attractive as PBT and PAT came in at N176.2bn and N150.7bn, with net margin at 30.7% while 12month trailing ROE settled at 23.7%.

Solid Capital and Liquidity position: ZENITH’s huge cash balance and relatively low Loans-to-Deposits ratio (LDR) made headline in Sept-19 when the CBN debited the Bank a total of N135.6bn due to failure to meet the Apex Bank’s minimum total funding to credits ratio of 60.0% as at Sept-19 ending. Clearly, the action of the CBN was supported by a review of the balance sheet position which shows LDR at 55.8% as liquidity ratio stood at 63.8%. However, NPL ratio remained below the 5.0% threshold at 4.95%, while Capital Adequacy Ratio (CAR) stood at 23.8%. With recent pronouncement by the CBN, we highlight the 9.2% expansion in the bank’s loan book to N2.2tn. With an updated pronouncement by the CBN for banks to maintain a minimum of 65.0% LDR, we expect efforts to further grow credit to intensify going forward.

Stable cost profile and profit margins restate a BUY rating: Our views on ZENITH remain positive, buoyed by efficient cost-to-operating revenue profile and stable margins. Although interest income is unlikely to improve by FY-19, stronger NII performance, cheaper funding cost and stable CIR are expected to keep profitability attractive. For context, PAT is expected to close the year around N200.0bn, again in 2019. Also, low CoR at 1.2% and NPL ratio of 4.95%, buttress our position as this implies that asset quality will remain stable. As noted above, recent regulation will compel the bank to further expand credit, hence we expect some traction in this regards. Finally, at the current price, the dividend yield is estimated at 14.7%, making the stock very attractive at the current price. The bank trades at a P/B ratio of 0.6x, less than 1.2x for GUARANTY. Again, with ROE of 23.8%, the ticker remains under-priced at N17.0. Accordingly, we maintain a BUY rating on the ticker.

Zenith Bank Earnings Update 9M-19: Rapidly driving e-banking volumes - Brand Spur
Sources: Company Financials, United Capital Research

United Capital Research