Zenith Bank Plc – Resilient Earnings Profile Amid Macroeconomic Headwinds

Zenith Bank
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Zenith Bank Plc reported a 4% topline growth in gross earnings in its 9M 2020 result driven by an 11% increase in non-interest income. The group’s net interest income rose YoY by 5% due to a faster decline in interest expense in 9M 2020.

Zenith Bank’s operating expenses grew YoY by 11% in 9M 2020. Profit before tax (PBT) rose by 1%, and profit after tax (PAT) increased by 6% in 9M 2020. The group’s EPS stood at N5.10k in 9M 2020 (9M 2019: N4.80k).

Net interest income grew but margin contracts due to declining yield environment

Interest income decreased YoY by 1% from N321.94bn to N318.82bn in 9M 2020 due to a profound decline in interest from treasury bills. While interest on loans and advances as well as other investment in financial assets were up for the period, revenue from treasury bills declined remarkedly by 46% from N74.27bn in 9M 2019 to N40.39bn in 9M 2020.

The significant decline was due to the decrease in treasury bills rates, which saw the Zenith Bank’s effective yield on treasury bills investment contract by 466bps from 9% in 9M 2019 to 4% in 9M 2020.

Elsewhere, interest expense declined YoY by 13% from N107.31bn to N93.64bn in 9M 2020 as a result of the group’s effort in the rebalancing of deposit mix as well as the declining yield environment. Expressly, interest on borrowed funds declined YoY by 32% from N49.15bn to N33.31bn in 9M 2020.

Also, while Zenith Bank’s deposits grew year-to-date by 23%, interest on current accounts as well as savings account was flat for the period. As a result, the group’s cost of funds declined YoY from 3% to 2% in 9M 2020. Consequently, net interest income grew YoY by 5% from N225.18b to N214.63bn in 9M 2020.

However, the group’s net interest margin contracted by 40bps to 8% in 9M 2020 due to the declining yield environment, as well as regulatory headwinds (such as the discretionary CRR debits by the central bank).

Sustained growth in non-interest income anchored by trading income and FX revaluation gains

Non-interest income grew YoY by 11% from N156.76bn to N173.49bn in 9M 2020 driven by trading income and other operating income, which grew YoY by 34% and 53%, respectively. Trading income increased from N66.86bn to N89.82bn in 9M 2020 buoyed by gains from treasury bills trading.

The group’s treasury bills trading income increased YoY by 15% from N79.73bn to N91.52bn in 9M 2020 as the group took advantage of the declining yield environment to ride the yield curve.

Also, the significant growth in other operating income was informed by FX revaluation gains, which grew by 53% from N13.47bn to N20.57bn in 9M 2020 due to naira devaluation as the group had a net long exposure to USD.

Total operating expenses continued to rise due to inflationary pressure and FX rate movement

Total expenses increased YoY by 11% from N176.94bn to N196.28bn in 9M 2020 pressured by general price increases as well as movement in FX rate, which impacted foreign currency denominated expenses.

For instance, information technology expenses (FX denominated) significantly increase YoY by 104% from N7.29bn to N14.88bn in 9M 2020. Also, fuel and maintenance cost grew YoY by 48% from N8.26bn to N12.03bn in 9M 2020 due to adjustment in energy tariffs. And personnel cost also increased by 5% from N57.07bn to N59.93bn in 9M 2020.

As a result, Zenith Bank’s cost-to-income ratio increased to 53% in 9M 2020 from 50% in 9M 2019.

Consequent to the sharp increase in expense compared to income, PBT grew YoY at a slower pace of 1% from N176.18bn to N177.28bn in 9M 2020. Similarly, PAT rose by 6% from N150.72bn to N159.32bn in 9M 2020 due to a lower effective tax rate. Overall, the group’s ROE stood at 22% in 9M 2020 (9M 2019: 24%).

Historical Performance

Zenith Bank Plc - Resilient Earnings Profile Amid Macroeconomic Headwinds Brandspurng1
Source: Company accounts, WSTC Research


We note Zenith Bank’s attractive earnings profile, supported by a robust revenue base. While interest income came under pressure due to the low yield environment, non-interest income has continued to support topline growth.

As we advance, however, we expect a normalisation of trading gains as well as FX revaluation gains

(the key drivers of non-interest revenue). Nonetheless, we expect the group to leverage its low-cost deposits to deliver competitive pricing for its risk assets, thereby boosting net interest income. Also, we expect the recent securitisation of the group’s CRR debits by CBN to support margins.

Overall, we have a fair value estimate of N38.34k on the stock. At the current market price of N22.60k, the stock trades at a 70% discount to our fair value estimate. Thus, we uphold our buy recommendation.

Financial Statement Summary

Zenith Bank Plc - Resilient Earnings Profile Amid Macroeconomic Headwinds Brandspurng2
Source: Company accounts, WSTC Research estimate