- Gross Earnings up 5% y/y
- Non-Interest Income improves 29% y/y
- PAT rises 8% y/y to ₦208.8 billion
- TP raised to ₦33.73 (Previous: ₦32.77)
ZENITH BANK released its Audited FY’19 earnings, reporting a 5% y/y growth in Gross Earnings to ₦662.3 billion (Vetiva estimate: ₦648.5 billion), despite a 6% y/y decline in Interest Income to ₦415.6 billion. The earnings improvement was driven by a 30% y/y increase in Non-Interest Income to ₦246. 7 billion (Vetiva estimate: ₦205.5 billion), the result of a 47% spike in Trading Income and a 24% y/y jump in Fees and commissions. Despite a 31% y/y rise in Provisions to ₦24.0 billion (Vetiva estimate: ₦20.4 billion), tame Opex growth of just 4% y/y supported the bank to achieve modest bottom-line growth, with an 8% y/y growth in FY PAT to ₦208.8 billion (Vetiva estimate: ₦207.1 billion) and an EPS of ₦6.65 (FY’18: ₦6.15).
Yield environment to pressure Net Interest Margins in FY’20
During the final quarter of 2019, yields moderated significantly, leading to a repricing of interest-bearing assets as well as a drive for cheaper retail deposits. This led to a 13% q/q decline in Interest Income, driven largely by weaker yields on short-term securities. With yields expected to remain largely suppressed in 2020, we foresee only modest growth in Interest Income, from higher-income on loans and advances booked in the previous financial year, and thus, we expect Net Interest Margins to remain pressured, but stable through the year.
Meanwhile, the bank expanded its loan book by 22% y/y while keeping the cost of risk manageable at 1.1% and reducing its NPL ratio to 4.3% (FY’18: 5.0%). Notably, the bank’s Nigeria arm was able to meet the minimum LDR requirement (68.6%), while the LDR for the group is at 57.8%. We do not expect the bank to grow its loan book as aggressively in 2020 and foresee modest loan growth of 5% y/y. Furthermore, we expect the bank’s NPLs to moderate 50bps and expect lower provisions (-28%) y/y due to the modest loan growth and focus on asset quality.
Non-Interest Income, stable costs to continue boosting profits
ZENITHBANK’s impressive Non-Interest Income growth was driven primarily by higher income (+108% y/y) from fees on electronic products, a result of the bank’s retail banking strategy, which also saw customer deposits rise by 15% y/y to ₦4.26 trillion (Vetiva estimate: ₦4.49 trillion). Meanwhile, given management’s objective of focusing on expanding the bank’s retail footprint, we project a 10% y/y improvement in Non-Interest Income in 2020, slower than the growth recorded in 2019 (29% y/y) primarily due to the lower-earning potential caused by the CBN’s new policies on fees and commissions.
Furthermore, the bank’s cost-to-income ratio moderated to 48.8% (FY’18:49.3%) indicating an effective cost-optimization strategy. Looking forward, we expect the bank to further improve cost-to-income to 48.3% in FY’20.
TP upgraded to ₦33.73 (Previous: ₦32.77)
Overall, ZENITHBANK’s performance in FY’19, as well as our expectations for FY’20 have led to an FY’20 PAT projection of ₦222.1 billion, a 6.3% y/y increase (FY’19: 8% y/y), yielding an ROAE of 22%. This gives an expected EPS of ₦7.07 and DPS of ₦2.90. We revise our 12-month target price (TP) to ₦33.73 (Previous: ₦32.77), a 76.6% upside from its current price ₦19.10. The stock has gained 6.7% YTD and is currently trading at a P/B of 0.6x vs a Tier-I peer average of 0.7x.
