Zenith Bank Plc FY’18 results – EPS expands by 11.2% YoY to N6.15

LAGOS (Capital Markets in Africa) – Gross earnings declined by 15.9% YoY to N620.0 billion, in line with our estimate of N632.8 billion (-2.0% deviation). In contrast, after tax profit improved by 11.3% YoY to N193.4 billion, in line with our N192.2 billion projection (+0.6% deviation). On a quarterly basis, gross and after tax earnings weakened by 4.6% QoQ and 21.1% QoQ to N145.4 billion and N49.2 billion respectively.

ZENITHBANK declared a final dividend per share of N2.50 bringing its total dividend for FY’18 to N2.80 per share (FY’17 – N2.70). This final dividend translates to a yield of 9.9% based on today’s close price of N25.35. However, management noted that a ratification of the proposed dividend could lead to additional tax charges of N22.3 billion—to account for the difference between the tax liability calculated at 30% of the dividend approved and the tax charge reported in the financial statement. This would effectively translate to an EPS of N5.44 (-1.6% YoY) compared to N6.15 (+11.2% YoY) as reported for FY’18.

Highlights for Q4’18:
In Q4’18, the bank’s interest income declined by 8.5% QoQ to N101.0 billion. This was as a result of lower interest income from loans and advances (-10.5% QoQ) and income from government securities (-4.9% QoQ) recorded during the period. Despite a modest 12bps improvement in cost of funds during the quarter (Q4’18 – 2.9%; Q3’18 – 3.0%), lower interest income weighed on overall net interest income, which consequently shrank by 10.0% to N67.1 billion.

In contrast, non-interest income grew by 5.7% QoQ to N44.4 billion. This was largely due to the N8.0 billion recorded in derivative and bond trading gains during the period. For context, as at 9M’18, the bank had recorded a loss of N22.3 billion in the aforementioned line items. Also, FX revaluation gains (+109.8% QoQ) supported non-interest income in the quarter. On the flip side, net fee income was lower at N11.9 billion (Q3’18 – N23.3 billion). Although, we think this was mostly as a result of the reclassification of N7.6 billion in electronic product expenses to fee and commission expenses during the period.

Unsurprisingly, operating expenses declined by 17.1% QoQ, reflecting the impact of the reclassification highlighted above. We also note that the lower operating expenses was supported by 46.4% QoQ decline in advert expenses. Loan loss charges shrank by 12.6% QoQ to N4.0 billion during the period. Cost of risk was flat at 0.9%.

Net loans to customers declined by 13.2% to N1.8 trillion, while deposits and total assets grew by 7.3% and 6.4% to N3.7 trillion and N6.0 trillion respectively.

Analyst take: Overall, ZENITHBANK’s FY’18 result bespeaks resilience despite a more challenging operating environment compared to FY’17. We highlight that while the bank was unable to grow credit assets (-13.2%), it was able to manage its other interest generating assets in order to protect its net interest margin (FY’18 – 8.90%; FY’17 – 8.94%). Cost of funds also impressed, shrinking to an industry low of 3.1% from 3.3% as at 9M’18 (FY’17 – 5.2%). We also like that the bank was able to sustain its asset quality, with NPL ratio printing at 4.98% (FY’17 – 4.70%), while cost of risk declined significantly to 0.9% (FY’17 – 4.3%). We also note that cost-to-income improved to 49.3% (FY’17 – 52.8%), while return on average equity came in at 23.8% (FY’17 – 22.9%). Going into FY’19, we believe that protecting its asset quality will be key to cushioning earnings as we look forward to a more deliberate focus towards the creation of loan assets.

We will provide an update after further discussion with management on the results. Our current target price for the counter is N35.23 (BUY) which is a 40.0% upside to last close price of N25.35. We note that the counter gained 5.63% at the close of trading today on the back of the impressive result. 

Source: CardinalStone Research