Decline in cost of funds buoys interest segmentÂ â Zenithâs recently released half-year results for 2021 revealed an improvement in the interest segment, with the net interest income inching up by 1.61% to N159.94 billion.
This improvement owes no thanks to the interest income, as the line item dipped by 6.00% to N203.93 billion, consequently causing the net interest margin to fall from 6.60% to 5.60%.
However, the increase in the net interest income rode on the back of a decline in the cost of funds, as it fell by 7 basis points to 1.30% in the review period.
It is also important to note that the moderation in the cost of funds came in against a backdrop of a higher yield environment relative to the low yield levels seen throughout 2020. Also providing support to the topline of Zenith, was a decline in their impairment charge, as it fell by 17.24% to N19.80 billion.
Non-interest segment consolidates topline growthÂ – The non-interest segment sustained its resilience, largely due to an improvement in the net fees and commission income. This revenue line was up by 42.27% to N47.66 billion.
Decoupling the performance of the fee-based income, the underpinningÂ drivers were upticks in the fees from account maintenance and electronic products, as these segments rose by 53.49% and 90.76%, respectively, while accounting for 50.42% of the total income received from fees. Â However, a surge in the operating expenses capped non-interest gains, as the expenditure line item was up by 17.95% to N97.59 billion.
This was largely due to a 28.83% upsurge in the amount expended on information technology, but the uptick was also supported by increases in several other expenditure line items under the operating segment.
Conversely, trading income remained supportive as it inched up marginally by Â 0.75% to N59.28 billion in the reporting period.
Bottom-line records improvementÂ Â – The bottom-line performance of Zenith printed in the greens, on the back of the improved performance in the interest and operating segments.
Accordingly, profit before tax and profit after tax increased by 2.57% and 2.21%, to N117.06 billion and N106.12 billion, respectively (as against N114.12 bn and N103.83 bn in HYâ2020). Likewise, the earnings per share ticked up by 2.42% to N3.38 in HYâ2021, from N3.30 in HYâ2020.
Zenith strengthens loan book, while sustaining sufficient capital buffersÂ – The lenderâs loan book inched up by 8.12% to N2.84 trillion, receiving support from a 17.64% increase in customersâ deposit for the period, while the loan-to-deposit ratio declined to 49.17% in HYâ2021 from 53.50% in HYâ2020.
This ratio is significantly shy of the 65.00% regulatory minimum set by the Apex bank. Elsewhere, the capital buffers of Zenith Bank sat comfortably above the 15% regulatory minimum, as it printed at 22.00% in the review period.
Keeping to the trend of interim dividendsÂ – In its characteristic manner, Zenith announced an interim dividend of N0.30, which is at par with the interim dividend paid in 2020. Qualification ends on September 10, 2021, while electronic payments will be made on September 20, 2021.
We remain bullish on Zenith
The improvements seen in the topline of Zenith is expected to be sustained, as the company continues to leverage its mainstream brand to keep the cost of funds low. Likewise, the non-interest segment should continue to receive support from fee-based incomes like the fees on electronic products, as this line item should experience continuous improvement as digitalization becomes more popular.
Accordingly, with an estimated fair value of N36.31, we place a long term buy recommendation on Zenith Bank Plc; Â hence, providing an upside potential of 48.41% at the current market price.Â
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