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Zenith Bank Plc - Lower impairments and operating expenses bolster Q3 2020 earnings

• Zenith bank released its unaudited 9M 2020 results, showing a marginal expansion in PBT by 0.62% YoY, while lower effective tax (-29.4% YoY) supported PAT, which expanded by 5.7% YoY. Precisely, PBT and PAT were 70% and 72.3% of our FY 2020 estimate. Key pressure points in the 9M 2020 result were expansions in loan loss provisioning and operating expenses, which were offset by a decline in interest expense and an increase in Non-interest revenue. With the result in line with our estimates, we left numbers unchanged. Our FVE of N30.2/share presents a 22.8% upside, which translates to a BUY rating on the stock.
• Largely mirroring the lower yield environment as well as better CASA mix, interest expense moderated by 12.74% YoY over 9M 2020, following lower interest expense on borrowed funds (-32% YoY) with cost of fund contracting by 75bps YoY to 2.2%. To buttress, we noted a 317bps YTD expansion in CASA to 92%, which makes it the highest in the industry (GTB’s CASA: 88%). The moderation in interest expense masked declines in interest income (-0.97% YoY). Consequently, net interest income rose by 4.92% YoY, while net interest margin moderated by 40bps YoY to 8.3% due to a faster fall in asset yields (-150bps YoY).
• Elsewhere, Non-interest revenue (NIR) expanded by 10.67% YoY to N173.5 billion on the back of higher trading income (+34% YoY) precisely from bonds (+111% YoY) and T-bills (+15% YoY). Further supporting growth in NIR is the 53% YoY increase in foreign exchange revaluation gains to N20.6 billion. These outweighed moderations in fee income (-20% YoY to N59.1 billion) reflecting revised fees and charges stipulated by CBN as credit related fees and electronic product fees declined by 8.11% YoY and 47.7% YoY, respectively. Meanwhile, operating expenses rose faster by 10.93% YoY relative to operating income (+7.35% YoY) due to higher depreciation and amortization expenses (+23% YoY), higher AMCON levy (+8% YoY) and NDIC (+7.14% YoY). Consequently, cost to income ratio rose by 240bps YoY to 52.5%.
• In terms of asset quality, NPL ratio declined by 15 bps YTD to 4.8% reflecting management’s restructuring of loans. However, Zenith still booked higher loan loss provision of N25.1 billion (+37.5% YoY) with cost of risk also expanding by 10 bps YoY to 1.3%.
• On the quarterly numbers, PBT came in higher by 14.1% QoQ, while higher effective tax (+276% QoQ) resulted in a mild expansion in PAT by 4.1% QoQ. The major driver for the expansion in PBT stemmed from lower loan loss provisioning (-94% QoQ) and decline in operating expenses (-14.2% QoQ). Clearly, the moderation in operating expenses largely mirrors the recognition of AMCON levy and NDIC premium in H1 2020 in line with the requirements of IFRIC 21 levies. Meanwhile, net interest income moderated by 10.7% QoQ mirroring a fall in interest income (-0.7% QoQ) and an increase in interest expense (+27.5% QoQ). Similarly, NIR declined by 18.4% YoY reflecting lower trading income (-28.5% QoQ).
• With the result in line with our estimates, we have left most of our estimates unchanged. We expect PAT to expand by 6% YoY to N220.4 billion over FY 2020. Our FVE of N30.2/share translates to a BUY rating on the stock based on current pricing. Zenith bank has an ROE of 21.5% and operating efficiency (CIR: 52.5%).