Zenith Bank Plc, in its Q1 2020 result, reported a 6% YoY growth in gross earnings. Interest income declined YoY by 7% while non-interest revenue grew substantially by 43%. Profit before tax (PBT) increased by 3% and profit after tax (PAT) flattened out with a 1% increase. EPS print N1.61k (Q1 2019: N1.160k) for the period.
Risk asset recovers but income from treasury bills dampens interest income
Interest income declined YoY from N122.48bn to N114.33bn in Q1 2020 driven by a steep decline in interest from treasury bills. Revenue from treasury bills declined markedly YoY by 64% from N42.41bn to N15.31bn in Q1 2020. We attribute the profound decrease to the declining yield in risk-free securities as well as the group’s declining investment in treasury bills, down by 21% year-to-date (YTD). That said, interest from loans and advances to customers rose YoY by 16% from N58.30bn to N67.54bn in Q1 2020. The growth follows an 11% YTD increase in the group’s gross loans and advances to N2.74tn (FY 2019: N2.46tn). Despite the rebound in income on loans, the profound decrease in revenue on treasury bills
dampened interest income.
On the other hand, interest expense declined YoY by 10% from N36.34bn to N32.83bn in Q1 2020, despite the growth in deposits by 5% YTD. The disproportionate decline in interest expense was due to the decrease in interest expense on borrowed funds. While interest on savings and time deposits spiked YoY by 22% and 30%, respectively, the interest cost on borrowed funds significantly declined YoY by 39% from N17.97bn to N10.96bn in Q1 2020. Similarly, the group’s borrowings reduced YTD to N286.37bn (FY 2019: N322.48bn). As a result, the cost of funds improved by 40bps to 3%. But net interest margin deteriorated 120bps to 8% due to a more pronounced decline in asset yield. Consequently, net interest income declined YoY by 5% from N86.14bn to N81.50bn in Q1 2020.
Trading and other operating income bloat non-interest revenue
Non-interest income spiked YoY by 43% from N32.66bn to N46.64bn in Q1 2020 informed by sharp increases in trading income as well as other operating income. Trading revenue rose YoY to N15.47 (Q1 2019: N7.81bn) driven by a 21% increase in trading income from treasury bill. Other operating income grew YoY to N15.73bn (Q1 2019: N3.53) buoyed by FX revaluation gain occasioned by CBN FX adjustment in Q1 2020. That said, net fee and commission revenue declined YoY by 28% induced by regulatory reduction of transactional fee, thus subtracting from the growth in non-interest income.
Cost deoptimisation drags bottom-line
The group’s total operating expenses grew YoY by 10% from N59.40bn to N65.40bn due to a 13% YoY increase in operating expenses. While staff cost was flat, operating expenses increased from N35.62bn to N40.19bn driven by growth in deposits insurance premium, professional fees, information technology, AMCON charges, among others. As a result, the group’s cost to income ratio deteriorated to 53% from 51% in Q1 2019. Thus, PBT grew YoY by 3% from N57.29bn to N58.79bn in Q1 2020. PAT settled at N50.53 (Q1 2019: N50.23bn). The group’s return on average equity stood at 22% (Q1 2019: 25%).
Recommendation
Sequel to our FY 2019 report, we noted our concerns on the downward trend in the two significant drivers of interest income of the group, particularly, the steep decline in interest from loans and advances in FY 2019. Interestingly, interest on loans and advances improved YoY by 16% in Q1 2020. Nonetheless, interest income remained depressed due to the profound decline in revenue from treasury bills. While we expect revenue from loans and advances to drive future growth in interest income, we continue to fade optimism on growth in revenue from risk-free investment given the low yield environment. While the group’s gross loans grew by 11% YTD (group’s LDR: 61%), we believe that future growth may be constrained due to the economic uncertainty induced by the dual impact of coronavirus pandemic and depressed oil prices.
We have a revised forward EPS of N5.53k on the stock (FY 2019 estimate: N5.64k) driven by the expectation of higher operating costs for the group. Also, we do not expect the Q1 2020 run rate on trading gains and other operating income to be sustained for the rest of the year. Overall, we have a fair value estimate of N13.96k for the group. At the current market price of N14.35k, the stock is trading at 3% premium to our reasonable estimate. Thus, we uphold our HOLD recommendation.
