A key element in Zenith Bank Plc’s profit earning growth in
2019 could help the bank “fend off a potential recessionary coronavirus-induced
economic blowback”.
Saheed Kiaribe, Director of Research at Proshare Nigeria,
said, “The shift in the rise of non-interest income may sterilize the bank’s
P&L statement from uncertainties surrounding interest income and CBN credit
and liquidity policies.”
Zenith Bank posted an impressive PAT (profit after tax)
growth of N208.8 billion ($570m) ahead of Chapel Hill Denham Securities’
forecast of 6% on stronger than expected Q4-19 performance.
The 18.0% YoY profit after tax growth in Q4-19 was “notably”
driven by non-interest income, which grew by 47.1% YoY and 60.3% QoQ, according
to Chapel Hill.
The bank’s profit after tax grew 8.0% in 2019 compared to
N193 billion ($530m) from 2018.
“In our view, the
growth in fees on electronic products (+160.0% YoY in Q4-19 and +108.2% YoY in
FY-19) reflects the positive impact of the bank’s digital drive, which we
expect to support further growth in e-banking transaction volumes in FY-20E
amid the reduction in charges,” analysts at Chapel Hill said in a note to
investors.
Overall, the bank’s growth was driven by a 29% increase in
non-interest income from N179.9 billion in 2018 to N231.1 billion in 2019, as
well as a slow 2.8% y/y uptick in operating expenses, according to Abiodun
Keripe, Head of Investment Research at Afrinvest.
Chapel Hill’s said, however, that it was concerned that net
interest margin contracted to 5.8% in FY-19 from 6.8% in FY-18 due to lower
yields on loans and investment securities. Despite the robust loan growth in
FY-19, interest income on loans fell by 43.7% as our estimated yield on loans
fell to 7.7% in FY-19 from 10.9% in FY-18.
“With lower yields on investment securities so far in FY-20E
and the 500bps increase in CRR, we expect the bank’s NIM to remain under
pressure in Q1-20E,” Chapel Hill said, although it has a buy rating on the bank
with a 12-month target price of N32.52, “which implies a total return of 81%
(capital gain of 68% and dividend yield of 13%). Zenith is currently trading at
a FY-20E P/B of 0.7x against our coverage average P/B of 0.6x.”
A disconnect between stock performance and the bank’s
earning
Zenith Bank Plc has traded between N16.20 per share and
N26.02 per share in the past year, trading at a discount to book value with a
price-to-book (P/B) ratio of 0.71 despite an 8% growth in PAT, when compared to
Guaranty Trust Bank (GTB)’s 1.31 and Stanbic IBTC at 1.36, as at February 24.
This has led many to wonder whether something was missing.
“There is obviously a disconnect between the stock
performance of Zenith Bank, which also is reflective of the overall equities
market performance in recent years, and the quality of earnings being reported
by the bank. Zenith is currently the second-largest bank in Nigeria with a
total asset size of N6.3 trillion ($1.7 trillion) as of 2019 FY. The bank
operates over 500 branches in Nigeria and in other countries including Ghana,
Gambia, Sierra Leone, United Kingdom, and representative offices in South
Africa and the People’s Republic of China,” said Keripe at Afrinvest.
“Speaking to the earnings, Zenith Bank reported impressive
2019FY PAT driven by a slow 2.8% y/y uptick in operating expenses and supported
by growth in non-interest revenue. Fees and commission were up 22.0% y/y while
the “other income line” grew by 34.5% y/y underpinned by 46.9% y/y jump in
trading income.
“Though there was a compression in net interest income (down
9.7% y/y), it still accounts for more than 50% of the Bank’s total operating
income. Lower interest rate environment in the last quarter of 2019 impacted
negatively on the net interest income in the face of a rigid asset/liability
structure. The stock market performance remains weak given weak sentiment and
low domestic institutional participation,” Keripe added.
With 2020 starting off on a slow note, Proshare’s Kiaribe
thinks Zenith Bank’s guidance numbers for the year are beginning to look
increasingly optimistic, “but a lot will depend on the moving domestic and
international economic parts in Q1 and Q2 2020.”
