ZENITH BANK PLC: Reduction in non-interest income impacts topline and bottom-line earnings

Zenith Bank Plc (Zenith Bank) in its recently released first quarter results for the period ended March 31th 2016, showed a slight drop in profitability due to 12% decline in gross earnings. Nevertheless, despite continuing tough operating environment Zenith Bank has been able to reduce its operational expenses. The Bank for the full year 2015 maintained its regular dividend payment, and has paid investors in the first quarter a total dividend payment of N56.51 billion (on the basis of N1.80 per share) for every 50 kobo share, which is higher than N1.75 per share paid consecutively in the previous two year. The Bank offers its clients a wide range of corporate, investment, business and personal banking products and solutions. The Bank is one of the biggest and most profitable banks in Nigeria. The bank was established in May 1990 and started operations in July same year as a commercial bank. It became a public limited company on June 17, 2004 and was listed on the Nigerian Stock Exchange on October 21, 2004.

NON-INTEREST INCOME IMPACTS NEGATIVELY ON TOP-LINE EARNINGS

Gross earnings for first quarter 2016 declined by 12.25% to N99.44 billion from N113.32 billion in the corresponding period of 2015; compelled primarily by a 52% decrease in non-interest income to N15.26 billion from N31.94 billion over the same period. The decline in non-interest income was driven by trading income, commission on turnover, other income and credit related fees which recorded decline of 134.91%, 100%, 83.98% and 31% respectively. Interest income grew marginally by 3.38% to N84.18 billion in the first quarter of 2016 from N81.42 billion in the first quarter of 2015, spurred mainly by a substantial 75% growth in interest from government bonds while growth in loans and advances rose modestly by 1%. Also, interest expense expectedly decreased by a striking 32.92% to N26.02 billion from N38.79 billion over the same period. A breakdown of the components of interest expenses shows that the decrease was triggered by a decline of 47% in interest expense on time deposits to N16.51 billion from N31.30 billion and 43% decline in interest expense on current account. Expectedly, net interest income rose significantly by 36.42% to N58.16 billion from N42.63 billion recorded at the end of first quarter 2015. The significant growth in interest expense was driven by a continued high interest rate environment due to the contractionary monetary policy in operation at the period. EFFECTIVE

MANAGEMENT OF EXPENSES FORESTALLS FURTHER DECLINE OF EARNINGS

Zenith Bank’s pre-tax profit grew by 3.04% to N32.12 billion in March 2016 from N33.13 billion in March 2015. This erosion of gains from the Bank’s earnings largely due to the decline in non-line interest income was limited by the management ability to effectively cut expenses as records showed that total operating expenses maintained a steady figure as it recorded a modest drop of 1.49 over the three-month period to N38.77 billion from N39.35 billion in March 2015; on the back of 13% decline in other expenses. Net income also decreased by a marginal 4.00% to N26.57 billion from N27.68 billion in the corresponding period. Furthermore, the bank also recorded a borderline rise of 1.84% in income tax to N5.55 billion in first quarter ended, March 2016 from N5.45 billion recorded in the corresponding period of 2015.

BANKS PERFORMANCE FAILS TO IMPROVE EFFICIENCY RATIOS

For the first quarter ended, March 2016, Zenith Bank grew its total assets slightly by 1.37% to N3.99 trillion from N3.94 trillion recorded as at March 2016. The growth in total assets can be attributed to significant increase in property and equipment, assets pledged as collateral and treasury bills by 25.08%, 39.1% and 24.82% respectively. The growth in loans and advances reflects the Bank risk nature as it appeared to have reacted appropriately to the current operating environment through a more cautious outlook on risk involved in each financial intermediation activities as it aims at reducing its non-performing advances which has risen to 2.2% from 1.7% year on year; with general commerce leading on loans and advances and also having the highest rate of non-performing loan. On the other hand, total liabilities decline by 1.19% to N3.37 trillion as at March 2016 from N3.41 trillion as at 2015. The decrease resulted from a 4.42% in total customer deposits to N2.56 trillion from N2.68 trillion at the end of first quarter 2015. Nevertheless, return on average equity (ROAE) currently stands at 4.63% while return on average assets (ROAA) at 0.67% as at first quarter ended, March 2016.

BUY RECOMMENDATION MAINTAINED

Despite the macro-economic headwind in most African countries and Nigeria CBN’s monetary tightening policies, which results into high cost of funds within the financial system, the Bank will be able to outperform general expectation if it operates an efficient liquidity and cost cutting strategy as it maintains a low NPL ratio. Similarly, with reinforced commitment towards an increased and effectively managed investment in technology and product innovations, customers’ business activities, solution and satisfaction will be significantly enhanced; hence will result in significant growth in Zenith Bank’s non-interest income. While we believe Zenith Bank will enhance its profitability in the coming months, we revise our 2016 financial year end projection after considering current and historical result to N477.73 billion for gross earnings and net income of N123.45 billion; leading to a forward earnings per share (EPS) of N3.93. However, using the current PE multiple and net assets valuation, we arrive at a 6-month target price of N17.12 and therefore recommend a BUY.

SIMILARLY, WITH REINFORCED COMMITMENT TOWARDS AN INCREASED AND EFFECTIVELY MANAGED INVESTMENT IN TECHNOLOGY AND PRODUCT INNOVATIONS, CUSTOMERS’ BUSINESS ACTIVITIES, SOLUTION AND SATISFACTION WILL BE SIGNIFICANTLY ENHANCED; HENCE WILL RESULT IN SIGNIFICANT GROWTH IN ZENITH BANK’S NON-INTEREST INCOME