ZENITHBANK Rated NEUTRAL as Income Lines Help Drive PBT Up by 35%


Thursday, August 13, 2015 04:25PM / FBN Capital Research   

Event: Zenith Bank reports Q2 2015 results

Implications: Market reaction likely to be neutral, ultimately  

Positives: Funding income strong, helped drive PBT up 35% y/y

Negatives: Significant losses on the other comprehensive income line and a high tax charge led to Q2 PAT falling -1.5% y/y

Zenith Bank’s Q2 2015 results which were published this afternoon showed strong underlying performance. PBT of N39bn grew by 35% y/y and beat our forecast by 18%.

However, PAT of N20bn was down slightly, by -1.5% y/y, because of two reasons – first, Zenith recorded a rather high tax charge of N13.6bn in the quarter, equivalent to a tax rate of 35%; second, the bank booked –N5.5bn in other comprehensive income due to a combination of fair value losses from equity investments and FX translation losses.

Returning to the PBT, both income lines helped the strong y/y growth: net interest income grew 32% y/y while non-interest income increased by 46% y/y such that profit before provisions rose 35% y/y.

Although loan loss provisions increased significantly (by over 400%) to N5bn, this was not a significant surprise, and the y/y growth was exaggerated by the fact that Q2 2014 loan loss provisions were unusually low.

Notwithstanding, the strong income that Zenith reported proved significant, offsetting the increase in provisions and outpaced a 25% y/y growth in opex. Sequentially, PBT grew by 18% q/q but PAT was down -30% q/q.

The impact of the negatives from the tax and other comprehensive income lines was felt more on the PAT line. As to the drivers behind the q/q growth in PBT, what is worth mentioning is the strength of the performance of funding income which grew 64% q/q, and more than offset a -34% q/q decline in non-interest income.

After a stellar Q1 in which non-interest income was boosted by FX trading, we expected a q/q decline, but not to the extent that Zenith reported. It appears that yield expansion played a greater role in boosting funding income than volumes (net loans were up only modestly q/q).  

Relative to our forecasts, as aforementioned, PBT surprised positively. However, PAT missed by 29%. While funding income surprised positively, non-interest income disappointed; the result missed our forecast by 22%.

Although there were other disappointments in the form of higher-than-expected loan loss provisions (17%) and opex (15%), the positive surprise in funding income more than compensated, hence the better-than-expected PBT result.

Consensus forecast for full year PBT and PAT stand at N124bn and N103bn.  While we expect the PBT forecast to be increased, we also assume that the PAT forecast will see a cut given the scale of the tax charge in Q2 and the loss on the other comprehensive income line.

We suspect that management will limit its commentary to the PBT and tax lines given the difficulties that the other comprehensive income line can present when providing guidance.

Zenith Bank shares are down -13.5% ytd, slightly worse than the ASI’s -11.3%. Zenith has proposed an interim dividend of 25kobo – the first for the bank. The yield equates to less than 2%. As such, we do not expect this announcement to have any bearing on the share price.

Ultimately, after what is likely to be an initial negative reaction to the disappointing PAT, we expect the market to shift its focus to the strong underlying result such that the shares trade ends up flattish.

We rate the shares Neutral. Our estimates are under review.

Zenith Bank Q2 2015  results vs. FBN Capital estimates


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