Zenith Bank: Cost of Funds Optimisation Amid Growth in Non-Interest Income.

Zenith Bank Plc recently released its Q1 2021 result. Zenith Bank’s Gross earnings declined by 6% year-on-year (YoY), driven by a double-digit decrease in interest income. Interest revenue decreased YoY by 12% due to the prevailing low-interest rate.

Non-interest revenue grew by 10% YoY, driven by an increase in fees and commission income. Operating income increased by 5% YoY while operating expenses grew by 6% YoY. As a result, Profit before tax increased by 4% YoY. Profit after tax rose by 5% YoY due to a lower effective tax rate. The group’s EPS stood at N1.69k in Q1 2021 (Q1 2020: N1.61k).

Net-Interest Margin Compressed On the Back of a Low Yield Environment

Interest income declined YoY from N114.33bn to N101.18bn in Q1 2021 due to the prevailing low-interest-rate environment. The low yield environment accelerated the downward repricing of the group’s interest-bearing assets. Essentially, interest on loans and advances declined by 4% in Q1 2021 despite the 2% year-to-date (YTD) comparative growth in gross loans. Also, yields on marketable securities were depressed in the period, evidenced by a 34% decrease in interest on treasury bills in Q1 2021. Thus, the low-yield environment, which affected income on risk and risk-free securities, led to the decline in the group’s interest income in Q1 2021.

Elsewhere, interest expenses declined markedly by 45% YoY from N32.83bn to N18.01bn in Q1 2021, driven by the steep decline in interest on term deposits.

Interest on term deposits decreased by 66% from N14.04bn to N4.74bn in Q1 2021 as the group rolled down on expensive funding source for a cheap alternative. As a result, the cost of funds improved by 150bps from 3% to 1% in Q1 2021. Nonetheless, the net interest margin contracted by 170bps from 8% as of Q1 2020 to 6% in Q1 2021 due to the low return on the group’s assets.

A Significant Jump in Fees and Commission Income lift Non-Interest Revenue

Non-interest income increased by 10% YoY from N46.64bn in Q1 2020 to N51.20bn in Q1 2021, driven by a 71% surge in fees and commission income. Fees and commission income grew from N21.28bn in Q1 2020 to N36.35bn in Q1 2021. The significant growth in fees and commission income was on the back of increased transaction volume across the channels. Essentially, credit-related charges and current account maintenance fees grew by 107% and 38%, respectively, in Q1 2021.  

Also, income on electronic products and asset-based fees increased by 105% and  72%, respectively, in Q1 2021. However, a 36% and 37% decline in trading gains and other income, respectively, in Q1 2021, partly offset the gains recorded in fees  +234 (0) 9062513716 and commission income.

Recommendation

We note the decline in the group’s gross earnings due to the pressured interest income. The industry interest revenue has been under pressure due to the prevailing low-interest-rate environment, which has exacerbated the pricing of risk assets and marketable securities and, by extension, the compression of the industry net interest margin. However, the group recorded double-digit growth in non-interest revenue driven by the surge in fees and commission income.

In our FY 2020 earnings report, we note that we expected the group’s transaction volume to rise as the economy recovers. That expectation has begun to materialise given the reported surge in transaction volume across channels. We also noted the increased adoption of the group’s electronic platforms. As we advance, we expect the group to leverage its low cost of funds for competitive pricing of its risk assets. We also expect a recovery in interest on government securities as the yield curve normalises.

Overall, we have a forward EPS of N7.80k on the stock with a fair value estimate of N24.95k per share. At the current market price of N22.00k, the stock trades at a 13% discount to our fair value estimate. With a dividend yield of 15%, the share offers a one-year total return of 29%. Thus, we recommend a BUY.