Zenith Bank Plc

Strong asset quality, rising margins

  • Zenith Bank reported audited FY 2018 results before the market opened today. Numbers were in line with our and consensus estimates. 
  • FY 2018 Net profits were reported at N193.4bn (US$529.9m), up 11% from the previous year. Net Interest Income (NII) was up 15% y/y. 
  • Zenith Bank proposes a total dividend of N2.80/s which (inclusive of an earlier interim dividend of N0.30/s) translates to a total dividend yield of 11.7% (the current 1-year T-bill yield is 17.34%). 
  • We maintain our Buy recommendation.

Net profits were up 11% y/y, broadly in line with our estimates. Net interest Income was up 15% y/y as a result of a significant decline in Interest expense (33% y/y) relative to a decline in Interest Income (7% y/y). This raised the Net Interest Margin to 7.5% from 7.0% in FY 2017.

The bank’s non-interest revenue did not develop well. The other Income line was down 46% y/y due to a weighty drop in trading income and Fees and Commission, which were down 1% y/y.

Expenses ticked up by 1% y/y, as the bank was able to manage its costs despite a significant increase (12% y/y) in the AMCON charge during the year. This increase was sub-inflationary. The inflation print for December 2018 was 11.44% y/y.

The bank’s provision for credit losses was perhaps the biggest surprise- down to N18.4bn (US$50.4m) from N98.2bn in FY 2017 on stronger loan quality in key areas of the business, such as loans to the energy sector.

Return on assets (RoA) of 3.3% and return on equity (RoE) of 23.7% are major improvements on 2017 and are well in excess of industry benchmarks for Nigeria. Zenith has also paid an increasing amount of dividend to its shareholders y/y. Consistency is the key point of comfort for us with Zenith.

We believe the bank still remains in a strong capital position, (the FY 2018 CAR was reported at 28% compared with regulatory minimum of 16%) despite the adjustment for the impact of IFRS 9. This provides the bank the leeway to grow risk assets (if it chooses) in 2019, and in turn improve interest income. We are confident in management’s ability to deliver earnings growth in 2019e.

We have a price target of N27.5/s for Zenith Bank and given the upside relative to current price of N24.00/s, we maintain our Buy rating on the stock.


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