Surging NII and NIR drives Zenith Bank’s impressive Q1 results

Zenith Bank (ZENITHBANK)released its unaudited Q1 24 results after the trading session on Friday, posting 269.7% y/y growth in Pre-tax profits and291.4%y/y growth in Net profits. The group’s earnings were driven by improvements in Interest income and Non-interest income, specifically trading revenues spurred by significant gains on its trading books. The stock is trading down by 10.0%y-t-d, however, we expect the results to drive positive sentiment toward the stock

Financial Performance
Earnings per share grew by 291.4% y/y following solid growth in Net interest income (+154.9% y/y) and Non-interest revenues (+273.3% y/y). The growth in Net interest income was supported by solid loan growth (+30.0% y-t-d) and increased yields on customer loans (+666bps y/y) and treasury bills (+1,002bps y/y), while a surge in trading revenues (+521.7% y/y) drove the improvements in Non-interest revenue. Interest expense rose by 157.0% y/y, driven by a 187.1% y/y increase in Interest paid on Customer deposits. The increase came as the group grew deposits by 10.7% y/y while the average interest rate paid on these deposits rose by 206bps y/y. As a result, the Cost of Funds rose by 128bps y/y to 4.0%. However, the Net interest margin expanded by 255bps y/y to 7.7% y/y.

Operating expenses surged 103.5% y/y on increased regulatory IT costs, Licenses, registrations and subscription fees, and personnel costs. However, following the larger growth in net revenue than costs, the group’s Cost-to-Income ratio declined 1,634bps to 34.9% y/y. Pre-provision operating profits rose by 298.8% y/y while Loan loss provisions more than doubled, rising by 624.1% y/y (Cost of risk rose by 201bps y/y in Q1 24).

Asset Quality
The cost of risk increased substantially from 0.7% to 2.8%, or 201bps y/y, indicating increased allocation to cover potential credit losses given the current macroeconomic realities and suggesting a more cautious approach possibly due to perceived higher risk in the loan portfolio.

Conclusion
The anticipated increase in asset yields is expected to contribute positively to funded income, thereby bolstering earnings in the coming months. Additionally, with the stock down 10.0% year-to-date, its valuation has become more appealing, in our view. SOURCE: Coronation asset management limited