Tuesday, January 22, 2019 1:21:51 PM- Nigerian Stock Exchange.

  ZENITHBANK results - Strong trading gains mask huge provisioning


March 14 (Lagos) - Zenith Bank Plc ( ZENITHBANK ) released its FY’17 result, posting improved y/y performances across both top and bottom line  up 47% and 37% respectively. 

Analysts at Vetiva Capital Management Ltd in Victoria Island had anticipated stronger earnings for the period given the already impressive performance as at 9M’17, Q4 earnings still came in much better than our estimate with FY’17 Gross Earnings and PAT coming in 10% and 14% ahead of our respective estimates.

Particularly, analyst highlights a marked deviation from their estimates across a few line items. Whilst Interest Income rose 23% y/y to N 475 billion (analyst estimate: N 469 billion), Non-Interest Income more than doubled y/y to N 271 billion, beating analyst estimate of N 211 billion and spurring a 47% y/y rise in Gross Earnings. 

According to management, Non-Interest Income was largely driven by trading gains, as well record processing volume of transaction – a trend we attribute to improving business environment. 

Analyst had highlighted that whilst lower interest rate environment pressures Interest Income, the impact of moderating rates is positive for Non-Interest Income as prices of fixed income instruments appreciate 23% of ZENITHBANK assets is invested in fixed income securities. Also, ZENITHBANK reported Derivative Income of N 68.7 billion for FY’17, a significant jump from the N 20.1 billion recorded in FY’16. 

Furthermore, whilst Operating Expense came in higher than we had estimated at N 227 billion (pressured by a 14% q/q rise in Q4’17), Interest Expense was mildly better than our estimate at ?217 billion.

Impairment charge however presented the biggest surprise for the period. Notably, the bank reported a loan loss provision of N 51 billion in Q4’17 standalone – above the cumulative N 47 billion reported at 9M’17. With the total loan loss expense coming to N97 billion for FY’17, the provision line came in significantly ahead of our N 55 billion forecast – translating a cost of risk of 4.3%. 

Despite this earnings drag, PAT rose 37% y/y to N177.9 billion, beating our estimate of N155.7 billion. With EPS coming in at N 5.67 (analyst estimate: N 4.96), the Board of Directors proposed a final dividend of N2.45 (total: N 2.70) – translating to a dividend yield of 8.7%.

IFRS 9 impact looms, loan loss to stay volatile

Given the 170bps rise in NPL ratio to 4.7% in FY’17, we are wary of loan loss expense pressure and anticipate some volatility from this end. 

Hence, analyst has raised their loan loss provision estimate for FY’18 to N86 billion (Previous: N42 billion) translating to a cost of risk of 3.9%. With the implementation of IFRS 9 earmarked for 2018, we highlight that management expects the adoption to lead to a N 42 billion reduction in shareholders’ fund. 

Consequently, analyst anticipates moderation in CAR in FY’18 even as the bank looks to explore opportunities to grow risk assets in strategic sectors. However, we note that ZENITHBANK’s CAR at 27% remains significantly better than the regulatory benchmark of 15%.

Mixed outlook for FY’18, TP revised higher to ?38.11

Save for large deviations around non-interest income and loan loss provision, we highlight that earnings came in largely in line with our estimates. Whilst analyst maintains their 10% loan growth forecast for FY’18 (down 8% in FY’17), they expect the y/y moderation in interest rate environment to cap Interest Income growth. 

However, analyst expects trading income as well as improving transaction turnover to continue to support other non-interest income. Given anticipation of possible easing in 2018 and in line with recent rate moderations, they forecast moderation in cost of funds to ease interest expense pressure. 

Particularly, analyst expects the strong growth in customer deposit recorded in FY’17 (up 15% y/y) as well as the healthy liquidity and capital adequacy ratios to provide leeway for growth in risk assets in FY’18. Overall, analyst  forecast a flat PAT of N 180 billion for FY’18 translating to an EPS of N 5.73. With earnings coming in better than we had estimated, analysts at Vetiva Capital  Management Ltd in Victoria Island raise our Target Price to N 38.11 (Previous: N 37.09). 

ZENITHBANK trades at forward P/E and P/B ratios of 5.4x and 1.1x vs. Tier I averages of 5.8x and 1.1x respectively.

reporting for easykobo.com on Wednesday, March 14 2018 from Lagos, Nigeria

Source - analysts at Vetiva Capital Management Ltd in Victoria Island, Lagos

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