19 October 2018 : Zenith Bank Plc (Zenith) released unaudited nine-months 2018 results which showed marked recovery in prior year pressure points, funding cost and impairment charge. Thus, earnings ran ahead of analyst's expectation as funding cost contracted 192bps YoY to 3.3% while impairment charge declined 70% YoY to N14.3 billion with annualized cost of risk printing at 1.0% (-186 bps YoY). Consequently, despite weaker gross earnings, EPS expanded 11.6% YoY to N4.59. ROAE and ROAA printed at 25.7% and 3.5% respectively, an increase of 250bps and 11 bps relative to 9M 17.

Non-Interest Revenue steam out. NIR declined by 20% YoY to N135.5 billion largely on the back of a loss in the bank’s derivative position1 and lower operating income (-32.6% YoY to N11.3 billion). Precisely, reflecting mark-to-market on its derivative position as it nears maturity, the bank reported a loss of N20.8 billion in the period relative to a gain of N28.8 billion in 9M 17. Consequently, Cost to Income ratio advanced higher by 390 bps YoY to 50.1%.

Funding cost pressure takes a bow. Funding cost over the period dipped by 192bps YoY to 3.3% reflecting a significant decline in the bank’s interest expense (-31% YoY to N110.5 billion). Sifting through the breakdown, the drop reflected a massive decline in interest expense on term deposits which moderated by 69.5% YoY to N32.9 billion. Importantly, CASA as a share of total deposit almost touched the 70% marking Q3 18 as it expanded by 548 bps YTD to 69%. Like GTB and UBA, asset yield came under pressure, declining by 125 bps YoY to 10.5%. Nonetheless, the moderation in funding cost was able to tame the weakness as NIM advanced higher by 53 bps YoY to 7.1%.

Q3 earnings on point. Contrary to Q3 earnings of UBA and GTB, Zenith’s Q3 stand-alone earnings showed a strong topline and bottom line performance. For context, despite sizable increase in funding cost (+28% QoQ to N35.8 billion) and lower NIR (-37.3% QoQ to N42 billion) over the quarter, the trio impact of higher interest income (+28.3% QoQ to N110.4 billion), lower operating expenses (-21.8% QoQ to N52 billion) and impairment charge (-10.3% QoQ to N4.6 billion) saved the day with PBT expanding 12.4% QoQ to N59.9 billion. The impact of this saw PAT almost double Q2 earnings with EPS expanding 80.2% QoQ to N1.99.

Analyst's take. Overall, Zenith’s performance was quite impressive, and analysts believe earnings would outmatch their expectations for FY 18E on the back of moderation in funding cost and lower impairment charge. For context, their FY 18E impairment charge of N74 billion is notably ahead of 9M 18 run-rate even as interest expense forecast runs ahead of current run-rate. However, analyst's major concerns are possible uptick in provision to 9mobile in Q42, risk asset creation, outstanding derivative position and sustainability of earnings in 2019. Analysts would be seeking management clarity on these concerns.

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.

Reporting for EasyKobo on Friday ,19 October 2018 in Lagos, Nigeria

Source: Emmanuel Adeleke from ARM Securities Limited

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