Zenith Bank 2019: Asset Quality Remains Healthy, Revenue Stays Subdued, But Profit, Dividend, Up

12M-2019 Performance Review
ZenithBankPlc today, Friday, 21 February 2020 released its audited financial statements for the period ended 31st December (12M-19) 2019. By this feat, it became the fourth quote company to have made available its audited financials to the Nigerian Stock Exchange (NSE) ahead of the 60-day deadline (after the due date).

Revenue subdued by lower yields on fixed securities
A close analysis of the results showed that consolidated Gross Earnings (GE)grew by 5.06%year-on-year (y/y) to₦662.25 billion, consisting of 62.8% interest income (₦514.56bn), 15.1% non-interest income (₦100.11bn), 17.8% trading income (₦117.80bn) and other incomes made up the rest. However, due to weakened yield returns on money and fixed income securities, interest income plunged by 5.8% against the figure achieved in 2018. In the Q4-19 standalone, interest income dropped by 7.3% to₦93.6 billion. Notably, yields on 91-day, 182-day and 364-day treasury bills closed 2019at 5.8%, 4.2% against 14.3%, 15.6% and 17.3%they closed in 2018 respectively. Again, returns on loans and advances to customers were weak, down by 14.7% y/y amid lower interest rate that hit the economy in the H1-19 when the MPC tweaked MPR from 14.0% to 13.5%, a measure taken to boost productivity and control inflationary pressure. Notwithstanding, loans, and advances at 56.1% dominated total interest income achieved. The bank needs to adopt strategic measures to drive up returns from loanable funds – it’s the biggest resource available to it.

Cost line items were relatively mixed year-on-year
Cost line items were relatively mixed in the year. While interest expenses went up by 2.8% due to the higher interest rate and increased business activity y/y, OPEX plunged by6.1% to₦129.45 billion as the bank cut costs on operating lease, advertisement and fuel consumption by 61.5%, 17.7%, and 30.9% respectively. As such, the OPEX margin dropped to 41.9% (vs 43.9% in 2018). Loan impairment charges grew by 9.7% to₦24.03billion as the bank made additional provision to cover for the last quarter of the year. Notwithstanding, Non-Performing Loan (NPL) trimmed to 4.30% compared to 4.98% in 2018.

Profit line up, bolstered by trading income and OPEX contraction
The bank’s trading income (income from trading on treasury bills and bonds) of ₦117.80 billion and low OPEX helped to wither the effect of weak interest income, thereby strengthening bottom lines. As such, pre-tax profit rose5% to ₦243.29 billion y/y. Total tax liability dropped by 9.9% in the absence of minimum tax liability (dividend tax on 2018 financial year’s profit), as such, profit after tax rose by 9.96% to₦208.84 billion. At this income level, earnings per share (EPS) moved up to665kobo, 7.95% higher than 616kobo in achieved in 2018, and it gives a Price/Earnings Ratio (PER) of 2.98x at the market price of ₦19.85 posted on Friday, 21 February 2020.

Asset quality remains healthy amid a strong liquidity position
As noted earlier, NPL at 4.30% is healthy, and it showed management effectiveness in reducing risky credit disbursement. Note that the bank’s NPL has continued to shrink from 4.98% in 2018 to the current figure, and it is below the industry’s guidance of 5.00%. The bank’s Capital Adequacy Ratio (CAR) is currently at 23.8%, a big buffer against a regulatory minimum of 15%. Although, the bank expanded its loan book by 26.5% to ₦2.31 trillion y/y, however, itsLoan-Deposit-Ratio (LDR) at 54.09% (vs 49.4% in 2018) fell short of the CBN’s minimum requirement of 65.0%. Notwithstanding, we commend the bank’s effort at pushing up LDR while simultaneously reducing NPL. The bank’s short-term liquidity ratio is healthy at 1.29x (vs 1.39x in 2018).

Financial position not looking bad
The bank’s total asset grew by 6.57% to ₦6.35 trillion, making it the second most capitalised bank in terms of total assets, just some figures behind Ecobank Transnational IncorporationPlc. Total equity/shareholders’ equity grew by 15.5% to ₦941.89 billion. As such, book value per share (BVPS) closed at ₦30.00 compared to ₦25.98 in 2018.

A final dividend of 250kobofor shareholders’ delight
The board of directors has indicated it will pay a dividend of 250kobo per share to its shareholders. Recall that the bank has earlier paid an interim dividend of 30kobo. This brings the total dividend that will be paid in FY-2019 to 280kobo per share. At the proposed dividend, a shareholder stands to gain a dividend yield (return) of 12.59% (based on Friday’s closing market price of ₦19.85). Obviously, the Zenith dividend yield is above the existing 1-year NTB, 1-year OMO Bill, and 10-year FGN Bond’s yields of 5.9%, 14.5%, and 10.8% respectively.

We maintain a Buy Recommendation on Zenith
Zenith Bank is an income stock and currently carries a dividend yield of 12.59%. We currently have a target price on Zenith Bank Plcat₦27.00, representing an upside potential of 36.02% premium to its current market price of ₦19.85. We, therefore, retain our BUY recommendation on the Bank with a waiting period of 9Months, which accommodates the financial year 2020.

Brief on Zenith Bank
Zenith Bank Plc was incorporated on May 30, 1990, and was granted a banking licence in June 1990. The principal activity of the Bank is the provision of banking and other financial services to corporate and individual customers. Such services include granting of loans and advances, corporate finance and money market activities. The Bank has six subsidiary companies namely, Zenith Bank (Ghana) Ltd, Zenith Pension Custodian (Nigeria) Ltd, Zenith Bank (UK) Ltd, Zenith Bank (Sierra Leone) Ltd, Zenith Bank (Gambia) Ltd, and Zenith Nominees Ltd.

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