Zenith Bank’s FY 2019 audited numbers showed a decline in
yield on Loans to customers and on money market instruments, however,
impressive growth in Non-Interest Income supported profit growth.
FY 2019 Return on Average Equity (ROAE) of 23.8% compares
with 24.3% for FY 2018. Though we expect Income will be impacted in the first
half of the year due to the COVID-19 restrictions and have revised down our estimates
accordingly, we expect this to be minimally offset by growth in some electronic
banking lines.
Asset quality also remains strong with an NPL ratio of 4.3%,
Cost of Risk (COR) 1.1% and coverage ratio of 148% as at FY 2019. We do not
expect a significant deterioration in asset quality in the near term.
Though we expect a strain in FCY loans following the
reduction in oil prices and elevated risks to devaluation in the local
currency, we expect that many of such loans will be restructured and their
tenors elongated in the near term. We estimate COR of 1.3% for FY 2020e.
Zenith’s FY 2019 Capital Adequacy Ratio (CAR) of 22%
(without the full impact of IFRS 9) remains comfortably above regulatory
minimum of 15.0% currently. Zenith bank has c.39% of gross loans in foreign
currency. We estimate that a 20% devaluation in the currency will result in a
45bps decline in the Nigerian bank’s 2020e CAR to 19.55% from 20.00% currently.
We find the valuation of the shares compelling (PBV: 0.47x,
PE: 2.1x) and though we expect income growth to be challenged owing to the
COVID-19 pandemic and the fragile economic conditions, we see no major disaster
in view. The bank rates well relative to peers based on capital sufficiency,
asset quality and sustainable long-term dividend yield.
We maintain a Buy recommendation on the stock and a revised
price target of N30.85/s from N36.37/s previously. Downside risks to our
forecasts are worsening macro conditions and an extended lockdown period beyond
Q2.
