Zenith Bank Plc H1 2018 Result- Earnings Lag Marginally As Weak Interest Income Weighs

Proshare

Tuesday, August 07, 2018 /12:02PM / Vetiva Research

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 0.30 DPS, ahead of our 0.25 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 our estimate following a much weaker Q2’18 performance, the bank declared a 0.30 per share dividend for the half year period beating our 0.25 per share estimate. Following an impressive start to the year, we 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 we 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. We 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 229 billion – behind our 257 billion estimate. Similarly, amidst a lower interest rate environment, Interest Expense also moderated within the quarter (down 40%) taking the expense line to 74.7 billion for H1’18 – 20% better than our 93.4 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 9.7 billion – in line with our estimate and significantly better than the 42.3 billion recorded in the corresponding period of 2017. However, Operating Expenses was up 6% y/y at 130 billion – ahead of our 128 billion estimate. Although PBT was up 16% y/y to 107 billion, 13% better than our 95 billion estimate, PAT came 2% behind our estimate at 81.7 billion – albeit up 9% y/y.

Earnings revised higher to reflect Non-Interest Income run rate

We have updated our model and revised our estimates to reflect the earnings deviation in H1. Notably, whilst we cut our loan growth forecast to -5% (previous: flat) and revise our Interest Income forecast lower to 459 billion (Previous: 515 billion), we revise our Non-Interest Income forecast to 202 billion (Previous: 136 billion) – in line with H1’18 trend. Overall, our Gross Earnings estimate is raised modestly to 661 billion (Previous: 651 billion). Also, following a significant y/y moderation in cost of funds to 3.4% (H1’17: 6.4%), we cut our Interest Expense forecast significantly to 151 billion (Previous: 187 billion).

Furthermore, with Loan Loss Expenses coming largely in line with our estimate, we maintain our provisioning at 19.8 billion for 2018 – translating to a cost of risk of 1.0%. Consequently, our Operating Income line is raised to 491 billion. However, with our Operating Expense raised higher to 242 billion – translating to a cost to income ratio of 51% and our effective tax estimate raised to 21% to reflect H1’18 run rate, we estimate a PAT of 197 billion (Previous: 182 billion) for FY’18. Overall, we revise our Target Price to 35.11 (Previous: 34.22). 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.

Proshare Nigeria Pvt. Ltd.


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