Zenith Bank 2019Q3: Concerted Efforts Needed To Restructure Income

By Imperial Assets

9M-2019 Performance Review
ZenithBankPlc on Wednesday, 23 October 2019 released its unaudited interim financial statements for the period-ended 30th September (9M-19) 2019. A close analysis of the results showed that both gross Earnings (GE)and Net Income (PAT)grew by 3.5%and 4.5% to₦491.27 billion and ₦150.72billion respectively compared to9M-18figures.

Concerted Efforts Needed to Restructure Income
Notwithstanding the single-digit growth seen on the top-line, Interest and Fees Incomes which have been pivotal in GE performance in the past took a hit in Q3-19 (stand-alone three months ended September) and plunged by 2.8% and 13.1% respectively. It exerted pressure on the consolidated 9M-19 as interest income plunged by 5.1% to ₦321.93 billion. We observed that the challenge here was due to a weak yield on short term securities and 18.2% dip on loans’ returns (from customers). It took the consolidated 9M-19 Fees and Commission growth of 19.1% at ₦73.85 billion bolstered by electronic banking (47% of fees and commission income)to remedy the challenge imposed by weak Interest Income. Notably, Q3-19 bottom line (PAT) was down by 0.96% to ₦61.84 billion. Obviously, Q3-19 was a headwind to the bank. The bank needs to employ strategic measures to reverse this trend, especially, to drive up returns from the loanable fund. However, returns on loans and advances to customers at 54.4% controlled the bulk of total interest income achieved.

Effective Cost Control aids Bottom Lines
The Bank was effective in curtailing cost items, and they added up for the growth seen in the bottom lines. Interest Expenses fell by 2.9% to ₦107.3billion but was not enough to halt the 6.1% decline in Net Interest Income as noted above. As such, Net-Interest Margin declined from 48.2% to 43.7%. Operating Expenses (OPEX) declined by 6.6% to ₦102.68 billion and were helped by 41.3% reduction on Fuel and Maintenance cost. Although consolidated Impairment charges rose by 27.4%, driving Cost of Risk (COR) to 1.2% from 0.9% in 9M-18, however, on a month-on-month basis, impairment cost was down by 2.04%. As such, the profit margins remained very attractive as PBT and PAT came in at ₦176.2billion and ₦150.7billion, with Net Margin at 30.7% while 9month trailing ROE settled at 17.3%.

Solid Capital and Liquidity position
Despite the current pressure on impairment cost, Non-Performing Loans (NPL) management maintained a healthy state at 4.95%, below the 5.00% threshold. The bank equally has one of the safest Capital Adequacy Ratio (CAR) at 23.8% which is a buffer against the regulatory minimum of 15%. As at 6M-19, the bank’s liquidity ratio was at 55%, thus above regulatory minimum of 30%. With the recent CBN’s pronouncement on Loan-Deposit-Ratio (LDR), the bank expanded its loan book by 12.0% y/y in 9M-19 but fell short of the minimum requirement of 65.0% at 51.7%. Although, it trailed 55.7% achieved in 9M-18, on Quarter-on-Quarter basis, it was an improvement over 47.3% posted in 6M-19. Going forward, we expect the bank to intensify efforts at growing the loanable credit further in order to meet the new regulatory date of 31 December 2019.

We maintain a Buy Recommendation on Zenith
Zenith Bank is an income stock and currently carries a dividend yield of 14.70% returns. We currently have a target price on Zenith Bank Plcat₦25.00, representing an upside potential of 47.1% premium to the closing market price of ₦17.70 as of Monday, 28 October 2019.

We, therefore, retain our BUY recommendation on the Bank with a waiting period 9Months which accommodates the FY 2019 earnings season.

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.