07 August 2018 ( Lagos ) : Audited half-year 2018 result of Zenith Bank Plc. (Zenith) was in line with analyst's expectation as EPS of N2.60 (+8.5% YoY) was driven by an ample decline in funding cost and impairment charge which largely offset the pressure from asset yields and lower non- interest revenue (NIR). The bank proposed an interim dividend of N0.30 (H1 2017: N0.25).
Lower funding cost lifted by term deposit. In sync with analyst's views, the lower yield environment provided the bank a break to reprice its deposit base, particularly term deposit which constitutes ~32% of total deposit. Consequently, interest expense contracted 39.4% YoY to N74.7 billion with annualized fund cost (WACF) down 297bps to 3.3%. The decline largely reflected a 75% YoY decline in interest expense on term deposit which largely offset interest on borrowings which was up 95% YoY—mirroring 14% increase in borrowings and FX impact on dollar debt.
Significant improvement in asset quality. Over the period non-performing loan(NPL) declined to N103billion(-3%YTD) which largely reflected possible reclassification of a key transport loan, with NPL to transport sector declining 77% YTD. Elsewhere, NPL in the general commerce and manufacturing sectors recorded YTD decline of 9% and 4% accordingly, while Oil & Gas NPL expanded by 18.7% YTD. However, due to contraction in loan book (-11% YTD), NPL ratio increased by 20bps to 4.9%. Thus, impairment charge declined 77% YoY to N9.7 billion (impairment on loans at N8.3 billion) with annualized Cost of Risk (CoR) moderating 360bps YoY to 1.0%.
Contracting Asset Yields. In terms of negative, interest income declined 12.8% YoY to N228 billion mirroring decline in interest income on loans (-18% YoY) and Investment securities (-13% YoY) with asset yields contracting 244bps to 10.6%. Irrespective, reflecting the faster decline in funding cost, Net Interest Margin (NIMs) expanded by 23bps to 7.2%.
FX losses impacts NIR. Similarly, non-interest revenue declined 20% YoY to N95.3 billion on the back of N18.6 billion FX losses—reflecting mark-to-market on its derivative position—which drove trading income lower by 44% YoY to N37 billion. That said, treasury bills trading income expanded 193% YoY to N55.1 billion while fee income expanded 24% YoY on the back of expansion in E-banking income to N10.1 billion (H2 17: N5.4 billion). Thus, due to lower income, cost-to-income ratio (CIR) expanded 5.03pps to 52.7%
Q2 earnings negatively impacted by NIMs and impairment. In the second quarter 2018 alone, the bank reported EPS of N1.10 (-26% YoY) due to lower NIMs and impairment charge. For context, reflecting lower asset yields of 6.9% (-386bps QoQ) which more than trump lower funding cost (-149bps to 2.6%), NIMs contracted 294bps to 5.7%. Elsewhere, impairment charge expanded 12.6% QoQ to N5.147 billion over the quarter, which to analyst's minds reflects higher NPL in the Oil & Gas sector. However, with N55 billion in treasury bills trading income over the quarter, NIR jumped 152% YoY to N66.96, despite N19.6 billion FX losses over the period.
Overall, Zenith Bank’s result was in line with expectation and in sync with analyst's views on a positive finish for FY 18E, reflecting lower impairment charge and funding cost, while the bank continues to leverage on its derivative position to drive the NIR leg. That said, the sustainability of earnings beyond 2018 remains a concern. Analysts will be seeking clarity from management on loan growth guidance, rising NPL to Oil & Gas, funding cost, derivative position, e-banking income, borrowings and deposit picture.
Analyst's last communicated FVE on Zenith Bank is N35.25 which translates to a STRONG BUY rating on the stock. Analysts will revisit their numbers after further analysis and discussion with management.
The bank will be holding a teleconference call Today August 7, 2018 at 2pm Lagos Time (2pm London/ 3pm Johannesburg/ 9am New York) with its senior management.
Reporting for EasyKobo on Tuesday ,07 August 2018 in Lagos, Nigeria
Source: Kayode Omosebi from ARM Securities Limited
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