05 March 2019 : Following the release of its FY 18 results, analysts had engagement with management to seek clarity on grey areas in the result and guidance for the year ahead. Management guided to 7.5% loan growth over 2019 with a lot of focus on Agriculture and manufacturing given government incentives to drive growth in these sectors. Management stated that they see some opportunities in the differentiated cash reserve ratio introduced by the MPC over 2018. With its focus on driving retail penetration, they guided to deposit growth of 10% YoY with ~50% of it coming from the retail customers. CAR is expected to remain flat, slight improvement in NPL to 4.8% (with coverage of 180%), and cost of risk and cost of funds to worsen to 1% and 3.5% respectively (in line with prior year guidance). Overall, management estimate PBT and EPS growth of 4% and 6% YoY respectively.

Analysts retain their STRONG BUY rating on Zenith with a revised FVE of N38.17/share (from N38.83/share). Over 2019, analysts forecast EPS of N6.57 which is 7% higher than 2018 (N6.16). Growth in earnings mainly reflects i) expansion in assets yield (+37bps YoY to 8.5%) from increase in loan book which would more than outweigh funding cost to support moderate expansion in NIM to 5.5% ii) increase in NIR following resilience in fee income and ii) improvement in asset quality with non-performing loan (NPL) ratio of 4.5% (-48bps YoY), slower expansion in cost of risk (CoR) to 1.0% with related loan loss provision of N19.2 billion (2018: N18 billion). Zenith trades at a FY 19E P/B of 0.9x, at a discount to GUARANTY of 1.3x, which is justified given the former’s strong and sustainable ROE. At current price, expected dividend of N2.92 over FY 19E translates to a dividend yield of 12.3%.

 Low-priced deposit mobilisation to persist, but short of guidance. With management achieving a strong fit on its low-cost funding over 2018, analysts expect a further consolidation going into 2019. Specifically, with CASA1 share of deposits expanding 200bps YoY to 66% in FY 18, analysts see further improvement to 67% going into 2019. In line with the drive for savings deposits growth (and conscious reduction of term deposits) analysts expect deposit growth of 7% (FY 18: 7.3% YoY) to N3.9 trillion, relative to management’s guidance of 10% YoY as analysts expect competition within the retail space to limit the scope for further expansion with banks scouting to solidify their presence ahead of the entrance of payment service banks.

Sticky NPL to drive appetite for short-dated facility. Within their coverage, analysts note that Zenith has significant room for loan growth over 2019 with loan to deposit ratio settling at 44.2% in FY 18. However, given the still elevated NPL, analysts sense management appetite for short dated instruments compared to term loans. With that in mind, analysts believe management will continue its drive to reduce duration of its loan book, which informed their effective FY 19 loan growth of 5% (net loan growth of 3.2% to N1.9 trillion) which tracks below management guidance of 7.5%. Beyond actual loan growth, analysts note that lower duration of the loan book as evidenced in FY 18 increases the velocity of its loan book and thus creates upside for credit related fee income.

On NPL, the deterioration over 2018 largely reflected further weakening in the quality of the bank’s exposure to manufacturing, real estate & construction. For clarity, despite the marginal increase in term loans, manufacturing NPL grew further to N31 billion (FY 17: N6.4 billion), Real estate & construction to N13.1 billion (FY 17: N7.4 billion), while oil & gas NPL improved to N38.4 billion (FY 17: N39.6 billion). To limit further deterioration over 2019, the bank restructured 36% ($822 million) of its FCY loans across oil & gas ($634 million), power ($70 million), manufacturing ($80 million) and other sectors ($38 million). With the total restructured loans representing 16% of gross loans amidst their expectation of further improvement across the troubled sectors, analysts estimate slight moderation in NPL over 2019 to 4.5%.

 Lower provisioning... more room to shrink. From a high of 4.7% in FY 17, the improved macroeconomic environment supported contraction in CoR to 0.9% in FY 18. With their outlook suggesting improvement in asset quality over 2019 with management preference for short dated maturity amidst restructuring of exposures across oil & gas, power and manufacturing, analysts do not foresee any significant pressure during the year. Also, with the expected reversal of excess provisioning on 9Mobile following the full resolution, analysts see the impact dwarfing CoR in the course of the year. Overall, analysts estimate further a moderate expansion in CoR to 1.0% in line with management guidance, which implies loan-loss provision of N19.2 billion (+4% YoY) over 2019.

On the ongoing talks between government and petroleum marketers which DMBs have been asked to reverse interest on subsidy-induced loans spanning the period of June 2017 to December 2018, Management guided that such reversal will have little or no effect as its exposure to the downstream sector is below N200 billion. The reversal is expected to be done in the course of the year when proceeds of the promissory notes for fuel subsidy related loans are received.

Impact of lower yields will be largely muted on NIMs. Analysts expect flat to lower interest environment over 2019, as the lower maturity profile for treasury assets for most part of the year amidst strong foreign exchange reserves suggests mild pressure on the apex bank as regards system liquidity pressure. As such, analysts expect relatively sticky yield on loan book and investment securities. However, with the bank guiding to an aggressive loan growth in the course of the year with their estimate suggesting appetite for shorter tenures, analysts expect effective yield on loans to be higher. Thus, analysts estimate 42bps expansion in asset yield to 8.5% in FY 19E (FY 18: 8.1%). On the funding side, while analysts acknowledge the downward re-pricing of maturing term deposits and continued retail drive for cheaper savings deposits, analysts believe liquidity concerns will limit the bank’s ability to shut out term deposits in the course of the year. As such, analysts are largely in-tune with management guidance on funding costs of 3.5% (+42bps YoY). Therefore, Net Interest Margin (NIM) is estimated to expand just 4bps YoY to 5.5%.

Fee Income to remain resilient. Analysts estimate non-interest revenue (NIR) to remain strong over 2019 reflecting resilience in fee income, which offsets declines in other operating income (- 14% YoY) and trading income (-16% YoY to N67 billion). On the former, analysts expect the lower legroom for naira depreciation in the course of the year to dwarf gains on assets revaluation. On trading income, management guided to an increase in its derivative books to $1.8 billion at the end of 2018, and it intends to settle the maturing $500 million Eurobond in April using dollar proceeds from maturing derivative contracts. As a result, analysts expect the bank’s derivative position to decline by same amount and estimate a further loss on the position of N18 billion over 2019. Furthermore, analysts estimate lower gains on treasury assets trading of N86 billion over 2019.

Earnings growth in the near term. Net impact of their overall adjustment translates to PBT of N248.3 billion and EPS of N6.57 (+7% YoY) over 2019. Analysts forecast EPS of N6.74 (+3% YoY) and N6.83 (+1% YoY) over FY 20F and FY 21F respectively. ZENITH trades at a FY 19E P/B of 0.9x, at a discount to GUARANTY of 1.3x, which is justified given the former’s strong and sustainable ROE. At current price, their expected dividend of N2.96 over FY 19E translates to a dividend yield of 12.3%.

Reporting for EasyKobo on Tuesday , 05 March 2019 in Lagos, Nigeria

Source: Oluwasegun Akinwale from ARM Securities Limited

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