ZENITHBANK: Reassuring Q1 2016 results

Proshare

Thursday, April 21, 2016 1:15pM/ FBNQuest

Choosing not to extrapolate positives from Q1 2016 results
Annualising Zenith’s Q1 2016 PBT gives a figure of N128bn. That compares with a full year guidance of N126bn. As the PBT guidance implies, 2016 is unlikely to be a growth year in any meaningful manner. Guidance for loan growth is 5-10%. As of March, the bank actually saw a -3% q/q decline. Of the two revenue lines, we expect the weakness in non-interest income (-52% y/y in Q1 2016) to remain visible through the year as the weak macro environment continues to weigh.

Consequently, despite Q1 2016 earnings coming in around 7-8% ahead of our expectations, we have made very modest changes to our forecasts, and have kept our price target unchanged at N20.1. Concerns about asset quality deterioration across the sector are likely to grow through the year. Bears could cite a difference of N11bn between the interest income reported on the P&L and that on the cash flow vs zero for Q1 2015 as evidence of potential collection issues.

Given Zenith’s impressive historical asset quality record, we do not believe the risk of a deterioration in asset quality is worrisome, especially relative to peers. Our valuation still implies a significant upside potential of 70% from current levels. We reiterate our Outperform rating.   

Q1 2016 earnings 7-8% ahead of our forecasts

Both Zenith’s Q1 2016 PBT and PAT were down -3% y/y and -7% y/y respectively, but each result beat our forecast by 7-8%. The decline in PBT stemmed from profit before provisions coming in 1.5% lower than a year ago at N73.5bn and a 23% y/y rise in loan loss provisions. Combined, these proved material relative to a slight fall of -1.5% y/y in operating expenses.

PAT declined more than PBT because Zenith booked a significant positive result in other comprehensive income (OCI, N1.1bn) in Q1 2015. This year, the OCI line came in at just N147m, an -86% y/y fall. Returning to profit before provisions, while net interest income grew strongly, by 36% y/y to N58.2bn, non-interest income fell -52% y/y to N15.3bn.

The main drivers behind the better-than-expected results (vs our estimates) were positive surprises on the provisions and opex lines, with variances of 41% and 10% respectively. These more than offset a weaker-than-expected profit before provisions result which missed by 5%. Although net interest income actually beat our forecast by 7%, the weakness on the non-interest income line (32% below our forecast) proved significant.


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