Zenith Bank Q3 2015 returns slower growth (9% y/y) in funding income


Friday, October 23, 2015 1:31 PM / FBN Capital Research

­Event:                      Zenith Bank reports Q3 2015 results

Implications:        Consensus estimates likely to move up

Positives:               Non-interest income up 16% y/y, beat our forecast by 18%

Negatives:             Slower growth (9% y/y) in funding income; below our expectations

Zenith Bank’s (Zenith) Q3 2015 results which were released this afternoon show that Q3 PBT of N31.9bn grew 10% y/y but Q3 PAT came in higher at N32.9bn thanks to a boost (N3bn) from other comprehensive income (OCI) which overshadowed the tax charge. Nevertheless, the PAT growth was just 4.4% y/y, slower than the 10% on the PBT line, because the OCI was down significantly (-62% y/y). Although profit before provisions (and opex) of N76bn grew by almost 12% y/y – thanks largely to a faster growing non-interest income (16% y/y) compared with funding income (9% y/y), this was matched by opex growth (12% y/y).

To a lesser extent, a 31% y/y rise in loan loss provisions also contributed (the magnitude of the provisions was not significant, however). Relative to Q2, although PAT grew 64% q/q, this was purely down to the positive impact of the OCI. Q3 PBT was down -19% q/q, driven by a -30% q/q decline in funding income. The latter proved significant, despite a 29% q/q increase in non-interest income and declines in provisions (-51% q/q) and opex (-11% q/q).

Compared with our estimates, PBT was slightly behind, by 6.5%. However, PAT beat by 13%, thanks to a combination of lower-than-expected taxes (-62%) and the OCI (we had forecasted zero on this line). Returning to the PBT, the slight weakness relative to our forecast was driven by funding income, similar to what we saw for the q/q trends. Non-interest income, loan loss provisions and opex all surprised positively.

The trend in funding income represents a reversal of what we saw in Q2. At the time management indicated that margin expansion drove the better-than-expected result in funding income as the bank did not renew expensive deposits which it had taken in around year-end once they matured. We would be looking for explanations from management as to why the trend reversed in Q3 (we do not believe that a -3% q/q decline in the loan book fully explains the funding income development given that a swap of state government loans for FGN bonds would have contributed to that decline in the loan book).

Year to date, Zenith shares are down -3.3%. Although they have outperformed the ASI (-13.4%), they continue to trade below fair value in our view. It would appear that the market is factoring a negative surprise in Zenith’s results for H2, possibly Q4. Full year consensus PBT stands at N132bn. We believe this view is pessimistic. Having said that, management’s guidance of N145bn looks more challenging following these Q3 results. On the back of the Q3 results, we would expect consensus forecasts to move up slightly, towards the mid-N130bn range.

FBNCapital estimates are under review and rate Zenith shares Outperform.

Zenith Bank Q3 2015  results vs. FBN Capital estimates


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