ZENITH BANK PLC :Cost optimization buoys profits   

24 April 2019 : ZENITHBANK has consolidated its position as a top-tier lender with c.15% of the system's loans and deposits and the second largest bank in Nigeria by most parameters in 2018 (total assets, performance and profitability, capital ratios, asset quality). The bank enjoys a strong corporate banking franchise that is focused on increasing low-cost retail deposits and lending competitively to large, low-margin, but creditworthy corporate entities, while generating greater transactional revenue through its electronic platforms and an expanding retail base. 

Low Interest Expense props PAT 

In its FY’18 audited results, ZENITHBANK posted a 15% y/y decline in Gross Earnings weighed by a 7.3% drop in Interest income. Surprisingly, Net Operating Income was up y/y by 14.8%, as Interest expenses contracted by 33.3% y/y to N144.5 billion following a 61.1% decline in interest paid on time deposits from N108.7 billion in FY’17 to N42.3 billion in FY’18. Consequently, FY’18 Net Interest Income was up 15.0% y/y with NIMs flat at 8.9% (FY’17 8.94%) even as cost of funds improved to 3.1% from 5.2% in FY’17, on account of a 28% rise in low cost savings deposits (Total deposits up 7% y/y). The bank deviated from industry trend to report a decline in Non-interest income of 30% from N270.6 billion in FY’17 to N190.3 billion, due to a 49.2% slump in trading gains. This development was unable to offset the cost efficiencies realized in delivering an 8% y/y growth in operating income, while operating expense was tamed at 1% y/y. 

Outlook and valuation 

Analyst's estimates for ZENITHBANK’s FY’19 performance include an average loan growth projection of 6%, a cost of risk of about 1.1% and a forward EPS N6.16. ZENITHBANK shares are currently trading at P/B multiple of 0.8x a slight premium to peer average of 0.7x. Analyst's 12-month price target of N37.41 for the bank, presents a potential upside of 79.0% to market price N20.90 and thus place a BUY recommendation on the stock. 

Reporting for EasyKobo on Wednesday , 24 April 2019 in Lagos, Nigeria

Source: Usoro Essien from Vetiva Capital Management Limited

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