ZENITHBANK released its audited 2021FY numbers on Monday, showing that the bank’s earnings growth remained defensive during the period. Specifically, continued improvements in the non-core business segment supported the performance, despite the lingering challenges in the core banking business environment. On the EPS of NGN7.78 (+6.1% y/y vs 2020FY), the bank’s board proposed a final dividend of NGN2.80/s (2020FY: NGN2.70/s), which equates to a dividend yield of 10.3% based on the closing price of NGN27.10/s as of the 28th of February 2022.
Interest income grew by 1.6% y/y to NGN427.60 billion, supported primarily by the income from loans and advances to customers (+16.5% y/y to NGN292.22 billion). The impressive income growth from loans and advances was in line with the bank’s drive to moderate sanctions from the CBN’s Loan-to-Funding Ratio (LFR) initiative non-compliance. Indeed, loan creation increased by +20.8% to NGN3.36 trillion during the year. That said, other contributory lines recorded declines – loans and advances to other financial institutions (-74.4% y/y) and investment securities (-10.4% y/y).
Also, interest expense declined by 11.8% y/y to NGN106.79 billion, reflecting lower interest costs on deposits from customers (-25.6% y/y to NGN60.32 billion) as the bank has maintained its strategy of amassing lower-cost deposits (CASA: 93.0% as at 2021FY similar to 2020FY: 93.9%). On the other hand, the cost of borrowings (+17.4% y/y to NGN43.04 billion) increased. Consequent to the decline in interest expense, net interest income settled higher by 7.0% y/y at NGN320.80 billion. After accounting for credit impairment charges (+51.6% y/y to NGN59.93 billion), net interest income (ex-LLE) settled 0.3% higher year-on-year. The significant growth in LLE confirms the higher risk environment as impairment charges are estimated using the IFRS9 Expected Credit Loss model.
Non-interest income (NII) generation was strong, settling 22.8% higher y/y at NGN309.04 billion. The growth recorded was supported by expansions in gains on investment securities (+37.6% y/y to NGN167.48 billion) and net fees & commissions income (+31.0% y/y to NGN103.96 billion) as the sector continues to benefit from the increased adoption of digital banking platforms. This expansion in NII, alongside the growth in net interest income, led to an 11.3% y/y increase in operating income to NGN569.91 billion.
Operating expenses growth was also significant given inflationary pressures in the macroeconomic environment and balance sheet expansion – leading to higher non-discretionary regulatory expenses. As a result, opex grew by 13.1% y/y to NGN289.53 billion, with most pressures exerted by AMCON levy (+22.5% y/y) and other operating expenses (+22.0% y/y) following a surge in IT, outsourcing services and maintenance costs. Following the opex growth relative to operating income growth, the bank’s cost-to-income ratio (ex-LLE) settled marginally higher at 50.8% (2020FY: 50.0%).
Given the lower interest expense and higher NII, profitability was more robust with profit-before-tax settling 9.6% higher year-on-year. However, profit after tax was 6.1% higher year-on-year, on account of a 41.6% y/y increase in income tax expense.
Comment: We like that Zenith Bank maintained the earnings growth momentum throughout the year, although at a slower pace (of 6.4% vs 10.1% in 2020FY) as it continues to grapple with headwinds from the business and regulatory environment. In our opinion, the bank remains one of the premier banks in the country, with strong fundamentals that denote its strength. We remain positive regarding the long-term outlook for the bank and expect financial performances to remain strong, supported by strong underlying fundamentals and strong management. We are reviewing our estimates.
