07 August 2018 ( Lagos )

SNAPSHOT

• Recovery in Non-Interest Income augments weak Interest Income 

• Loan book picks up (up 7% q/q) albeit down 11% ytd 

• H1’18 loan loss contained, on-track for a 1.0% cost of risk 

• Board proposed N0.30 DPS, ahead of analyst's N0.25 estimate 

Mixed performance as PAT marginally misses estimate 

Following the audit of its half year result, ( ZENITHBANK ) released its financial statements for the period - posting mixed performances across major line items. Although bottom line came in behind analyst's estimate following a much weaker Q2’18 performance, the bank declared a N0.30 per share dividend for the half year period beating analyst's N0.25 per share estimate. Following an impressive start to the year, analysts had expected Q2’18 to come in modestly strong – albeit at a slightly weaker run rate. The second quarter performance however came in much weaker than analysts estimated. Particularly, Gross Earning was down 10% q/q after a strong 152% q/q rise in Non-Interest Income was unable to offset the impact of a 40% q/q moderation in Interest Income. 

Analysts highlight that the weaker Interest Income for the Q2’18 period came despite a 7% q/q growth in loan portfolio. Cumulatively, Interest Income was 13% lower y/y to N229 billion – behind analyst's N257 billion estimate. Similarly, amidst a lower interest rate environment, Interest Expense also moderated within the quarter (down 40%) taking the expense line to N74.7 billion for H1’18 – 20% better than analyst's N93.4 billion estimate. In line with the trend observed across a few banks that have released H1’18 result so far, Non-Interest Income came in much stronger within the second quarter following a ramp up in volume of transactions as well as an increase in E-business income. 

More importantly, asset quality continues to improve as the bank reported a loan loss provision of N9.7 billion – in line with analyst's estimate and significantly better than the N42.3 billion recorded in the corresponding period of 2017. However, Operating Expenses was up 6% y/y at N130 billion – ahead of analyst's N128 billion estimate. Although PBT was up 16% y/y to N107 billion, 13% better than analyst's N95 billion estimate, PAT came 2% behind analyst's estimate at N81.7 billion – albeit up 9% y/y. 

Earnings revised higher to reflect Non-Interest Income run rate 

Analysts have updated their model and revised their estimates to reflect the earnings deviation in H1. Notably, whilst analysts cut their loan growth forecast to -5% (previous: flat) and revise their Interest Income forecast lower to N459 billion (Previous: N515 billion), analysts revise their Non-Interest Income forecast to N202 billion (Previous: N136 billion) – in line with H1’18 trend. Overall, their Gross Earnings estimate is raised modestly to N661 billion (Previous: N651 billion). 

Also, following a significant y/y moderation in cost of funds to 3.4% (H1’17: 6.4%), analysts cut their Interest Expense forecast significantly to N151 billion (Previous: N187 billion). Furthermore, with Loan Loss Expenses coming largely in line with their estimate, analysts maintain their provisioning at N19.8 billion for 2018 – translating to a cost of risk of 1.0%. Consequently, their Operating Income line is raised to N491 billion. 

However, with their Operating Expense raised higher to N242 billion – translating to a cost to income ratio of 51% and their effective tax estimate raised to 21% to reflect H1’18 run rate, analysts estimate a PAT of N197 billion (Previous: N182 billion) for FY’18. Overall, analysts revise their Target Price to N35.11 (Previous: N34.22). ( ZENITHBANK ) trades at forward P/E and P/B ratios of 3.8x and 1.0x vs. Tier I averages of 5.1x and 1.0x respectively. 

Reporting for EasyKobo on Tuesday ,07 August 2018 in Lagos, Nigeria

Source: Olalekan Olabode, CFA from Vetiva Capital Management Limited.