Monday, August 14, 2017 1:55PM / ARM
Zenith Bank Plc. (Zenith) released audited H1 2017 result with its numbers
showing a two-fold YoY increase in EPS to N2.40 largely supported by surprise
FX trading income and FX revaluation gains. In addition, the bank declared an
interim dividend of 25kobo— unchanged from last year—which translates to a
dividend yield of 1.0% on current pricing.
the impressive earnings, breakdown showed sizable decline in core performance
with Net Interest margin (NIM) contracting 56bps YoY following substantial
funding cost pressure (WACF: +310bps YoY to 6.3%).
loan loss provision was 3x higher relative to prior year at N42billion, reflecting
higher specific and collective provision (Cost of Risk: +263bps YoY to 3.9%).
the outsized FX trading income (N46billion) and FX revaluation gains
(N15billion), H1 17 EPS would have declined 60% YoY, although adjusting for
similar Cost of Risk as with prior period (1.2%), EPS would have risen by 20%
Derivative gains to NIR masks soft core earnings
earlier stated, Zenith’s results owed much to gains on currency forward
positions of N69.5billion (derivative assets and liabilities of N82.1billion
and N17.2billion respectively).
believe the change in the reporting of forward contracts from NIFEX to NAFEX in
April 2017, which embodied a 16% gain helped Zenith book gains on existing
counter-party forward contracts.
Zenith’s small net long USD position helped book revaluation gains of N4billion
(+202% QoQ) in the quarter. Consequently, the Q2 17 reading from FX gains
bolstered NIR (+199% QoQ to N88.5billion) over the quarter.
Funding cost pressure moderates NIMs
earlier stated, core performance remains weak for Zenith. The bank continues to
suffer under the elevated interest rate environment despite its liquid balance
sheet position which allowed it benefit from high treasury bill income (20%
QoQ) and upward loan repricing (interest income on loans: 27% QoQ).
Basically, while asset yields expanded 200bps QoQ, NIM came in lower (30bps QoQ) at 6.7%. The pressure, which emanated from higher term-deposit cost (82% QoQ), drove funding cost pressures with annualised WACF expanding 260bps QoQ to 7.6%. We will be seeking further clarity from management on the increase in term deposit given that term-deposit declined 3% QoQ while CASA’s share of deposit was flat at 61%.
Asset quality issues persists
quality deteriorated over the quarter with NPL ratio rising to 4.3% (Q1 17:
3.2%). Breakdowns provided by Zenith throws up increases in Transport (34x YoY)
and General commerce (1x YoY) as the main triggers of the higher NPLs even as
NPL to O&G remained sticky (2.3% YoY).
the 12x and 1.4x increases in specific impairment to Transport and General
commerce sector respectively, we are now more concerned on asset quality which
we think are related to key loans in the aviation and trade sectors.
will also seek further clarity from management on the specifics to guide our
revision to forecast. On balance, loan loss provision expanded nearly four-fold
QoQ to N34.5billion with annualized Cost of Risk trending higher to 6.3%
down, operating expenses increased 54% QoQ despite declines in personnel cost
(-70bps QoQ). Pertinently, AMCON’s levy, which expanded 200% QoQ to N16billion,
drove operating cost pressure in the period. That said, the impact of strong
NIR was able to offset elevated cost marginally to leave Cost-Income ratio at
47% (-60bps QoQ).
Overall, despite higher gross earnings (24% QoQ), funding cost pressure and elevated expenses moderated potential pass-through to EPS (+90bps QoQ to N1.20). ROAE stayed flat relative to prior quarter at 21.5% (Q2 16: 5.7%).
Muted prospects for higher NIR
forecast FY 17E WACF at 5.2% (2016: 4.2%), largely reflecting expected
pressures from term deposit and borrowings. The foregoing brings FY 17E
interest expense to N202.5billion (+40% YoY). Laying our funding cost
assumption with FY 17E asset yield of 10.9% (interest income: 33% YoY to
N513billion), we now expect NIM to come in at 6.6%.
NIR, given our views on improved dollar liquidity, we think the bank will be
unable to secure further forward contracts from counter-party. The impact of
this, alongside our expectation of stable-to-slight fall in the NGNUSD, guides
to limited scope for FX income from its derivative position in coming periods.
despite expected gains from treasury bills as well as net fee income (+5.7% YoY
to N72billion, we forecast NIR at N135billion for FY 17E (+10% YoY).
Furthermore, given asset quality concerns stated earlier, we forecast 2017E NPL
and Cost of Risk at 4.0% (2016: 3%) and 2.7% (2016: 1.4%) respectively,
which translates to impairment charge of N68billion.
all, we forecast FY 17E EPS of N4.95 (+20% YoY). Our FVE of N27.30 translates
to an overweight rating on the company. The stock trades at a P/B of 1.1x
relative to peer average of 0.9x.