Zenith Bank Plc reported YoY a topline growth of 4% from N474.61bn to N491.23bn in its 9M 2019 result for the period ended September 30, 2019. Interest income declined YoY by 5% while non-interest revenue grew YoY by 22% during the period. Profit before tax (PBT), as well as profit after tax (PAT), advanced YoY by 5%, with EPS at N4.80k (9M 2018: N4.58k).
Loan book recovers but yet to reflect on interest income
Interest income declined YoY by 5% from N339.06bn to N321.94bn in 9M 2019 on the back of the decrease in interest on loans and advances to customers as well as interest on treasury bills. Interest on loans and advances declined markedly by 18% occasioned by the declining loan book of the Group in the first half of the year. However, following the CBN directive on July 2019 that all deposit money banks (DMBs) should maintain a minimum loan-to-deposit ratio (LDR) of 60% by September 30, 2019, to promote investment in the real sector and enhance economic growth, the Group turned constructive on its risky assets. Specifically, loans and advances to customer grew by N252.80bn in Q3 2019 alone and rose YoY by 7% from N2.07tn to N2.20tn in 9M 2019. Despite the impressive run, the bank failed to meet the requirement and was slammed with an onerous cash reserve requirement of N135.63bn. However, the fund would be released as the Group ramps up its LDR to the minimum regulatory threshold (now 65% with December 31, 2019, as the new deadline).
On the bright side, interest expense declined YoY by 3% from N110.55bn to N107.31bn in 9M 2019 notwithstanding the robust growth of 20% in the Group’s customers deposit base from N3.28tn to N3.95tn as at 9M 2019. Though, interest on savings accounts surged YoY by 42% from N12.79bn to N18.21bn in 9M 2019, the combined effect of the decline in interest on time deposit and borrowed funds by 5% and 13%, respectively, was enough to tame the impact. But owing to the steeper decline of 5% in interest income compared with 3% decrease in interest expense, net interest income declined YoY by 6% from N228.52bn to N214.63bn in 9M 2019, with net interest margin moderating by 91bps to 9%. However, riding on the strength of increased customers deposit base amid lower interest expense, cost of funds declined YoY by 35ps to 3% in 9M 2019, consolidating on the Group’s drive towards funding cost optimization.
Non-interest revenue expanded YoY by 22% from N128.73bn to N156.76bn in 9M 2019 as net income on fee and commission, trading income, as well as other operating income grew by double-digit of 19%, 26%, and 16%, respectively. The 19% growth in net income on fee and commission from N62.01bn to N73.85bn in M 2019 was driven by 100% growth in fees from electronic products from N17.66bn to N35.32bn in 9M 2019 as the Group continues to improve on its digital platforms and share in the retail business. A 6% growth in income from treasury bills trading informed the increase in trading income while receipts from loan recoveries of N4.68bn drove the growth in other operating income.
On the back of continued cost reduction strategies of the Group, operating expenses grew mildly YoY by 1% from N175.61bn to N176.94bn in 9M 2019 anchoring cost-to-income at 50% (9M 2018: 51%). Consequently, PBT rose to N176.18bn (9M 2018: N167.31bn) while PAT settled at N150.72bn (9M 2018: N144.18bn), delivering a return on average equity of 24%.
Recommendation
We continue to maintain our constructive view on the Group as its funding cost optimization and cost reduction strategies continue to yield results. Given the Group’s LDR at 56% in 9M 2019, we expect management to continue to create viable risk assets within its risk management framework to support interest income.
We have a revised forward EPS of N6.37k with a fair value estimate of N27.57k. At the current market price of N17.00k, the stock is trading at a discount of 62% to our fair value estimate. Thus, we uphold our BUY recommendation.
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