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Nigeria: Non-interest income lifts Zenith Bank’s 2019 earnings

By Ruth Olurounbi
Posted on Thursday, 5 March 2020 14:45

Jim Ovia, Chairman of Zenith Bank, Nigeria REUTERS/Sumaya Hisham

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.

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“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.”