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.