Company Analysis

Coronation Research analysis of Zenith Bank’s FY 2018 results

Strong asset quality, rising margins

 

Zenith Bank reported audited FY results before the market opened.
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 2019.
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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