Analyst gives a BUY Rating on Zenith Bank Plc on Q1 2015 Results


Wednesday, April 22, 2015 11:45 AM / ARM Research

Zenith Bank Plc (Zenith) released Q1 2015 unaudited results wherein gross earnings rose 20% YoY to N113.3 billion while PBT and PAT expanded 15% and 17% YoY to N27.7 billion and N28.7 billion respectively.

Moderation in interest income overrides sustained NIR momentum
Relative to Q4 14, Q1 15 gross earnings are 13% lower as 19% contraction in interest income to N81.4 billion offset 8% QoQ increment in NIR to N31.9 billion.  Disaggregating the components of interest income shows that the cutback in interest income was underpinned by 17% QoQ moderation in ‘interest on loans and advances’ and to a lesser extent bank placements (-82% QoQ).

Curiously, the cutback on the item comes amid higher interest earning liabilities (+7% QoQ to N3.8 trillion) on account of 10% QoQ rise in loans and advances which resulted in lower assets yields (-10bps QoQ). On NIR, breakdowns provided by Zenith reveal a four-fold expansion in other income, amid cutbacks in fees (-52%) and trading income as the driver behind the item’s sustained growth. As with Q4 14, gains on NIR remain anchored by FX income given naira volatility over the first six weeks of 2015.

Cost control mutes funding cost pressures
On the heels of the 79% QoQ spike in Q4 14, interest expense continued to track higher rising a further 4% QoQ to N38.8 billion, despite the moderation in interest income. Parsing through breakdowns provided by Zenith identify increases in current (+15%) and savings accounts (+11%) amid 4% QoQ moderation in both expense on borrowings and time deposits as the underpinning. Thus, we believe growth in funding base (+7% QoQ to N2.7trillion), driven by deposits (+6%), came at a higher cost.

Offsetting the funding cost pressures were cutbacks in opex (-23% QoQ to N39.4 billion) and provisions (-74% QoQ to N2.1 billion). The former was driven by moderation in personnel expenses (-30%) and other opex (-23%) which drove a 2pps QoQ moderation in CIR to 53%. The improvement in provisioning (which bucks the trend thus far in Q1 15 earnings releases) drove a 30bps QoQ moderation in annualized cost of risk to 0.3%. Consequently, PBT was flat QoQ whilst PAT is 3% lower QoQ. Correspondingly, PBT and PAT margins are 700bps and 500bps lower QoQ at 29% and 24% respectively.

Loss of NIR support and funding pressures to drive moderation in FVE
We remain less constructive about earnings growth over the rest of the year as the lack of volatility in domestic FX markets post RDAS closure robs NIR of its key support.

In addition, the funding cost pressures suggest Zenith is more susceptible to CRR tightening pressures than our earlier expectations. Whilst improvement in opex could help temper earnings weakness, as with the sector, the weakened landscape suggests higher scope for asset quality deterioration over the rest of 2015.

Consequently, we see scope for moderation in our last published FVE (N29.59). Zenith trades at a P/E and P/E multiple of 7.04x and 1.4x which are at premia to respective peer average of 4.9x and 0.9x. We have a BUY rating on Zenith.

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