Zenith Bank Plc Q2 2017 Results: Initial Impression

August 11, 2017/InvestmentOne Research

NIGERIA | EQUITIES | BANKING | ZENITH BANK PLC

Q2 2017 results highlight: Surge in loan impairment charges weighs on gains from FX trading

·         Net interest income of N68.36bn, down  -3.2% q/q; -0.7% y/y

·         Profit before tax of N47.98bn, up +8.6% q/q; +120.3% y/y

·         Profit after tax of N37.82bn, up +0.9% q/q; +325.2% y/y

Late yesterday, Zenith Bank released its Q2 2017 results, which showed a +8.6% q/q increase in PBT to N47.98bn but -8.6% lower than our estimate.

The bank’s performance was largely driven by the +198.7% q/q surge in non-interest income, which more than offset the +96.6% q/q spike in opex, N26.6bn q/q increase in loan impairment charges and the -3.2 q/q decline in net interest income.

We highlight that the loan impairment charge taken in the YTD (N42.4bn) is +31% higher than in FY 2016.

The surge in loan impairment charges could have been the result of the deterioration in asset quality. Non-performing loans (NPL) increased by +27% q/q to N99.2bn in Q2 2017, the majority of which was due to manufacturing and general commerce/trading exposures. This pushed the bank’s NPL ratio up +110bps q/q to 4.3% as at Q2 2017, slightly below the regulatory threshold of 5%.

In dissecting the numbers further, we point out that the non-interest performance was the result of the N45.9bn q/q jump in FX trading income. This does not appear to be driven by revaluation gains but may not be unconnected with the significant improvements in foreign currency liquidity following the recent shift in CBN’s FX policy.

Compared to Q2 2016, PBT spiked by +120.3% y/y due to the N70.4bn y/y surge in non-interest income, which cancelled out the N22.9bn y/y uptick in loan impairment charges and the +59.9% jump in opex.

In the near term, we believe the bank’s performance should continue to see support from the high interest rate environment, given our expectation that monetary policy may remain tight till year end. This combined with the gains from the increase in foreign currency liquidity should be a positive for earnings. However, we highlight that the continued deterioration in asset quality may remain a drag on PBT and ROE.

The company proposed a dividend of 25kobo per share representing a 1.04% dividend yield on yesterday’s close price.

While our models are under review we rate Zenith (BUY).

ZENITH BANK Q2 2017 figures (N millions)

Q2 2017

Q/Q

Y/Y

I-one est.

Actual vs I-one est.

H1 2017

Y/Y

I-one est.

Actual vs I-one est.

Gross Earnings

232,704

57.5%

101.7%

149,083

56.1%

380,440

77.1%

296,819

28.2%

Interest Income

144,165

22.1%

48.3%

119,642

20.5%

262,257

44.6%

237,734

10.3%

Interest Expense

(75,807)

59.6%

167.3%

(42,050)

80.3%

(123,295)

126.7%

(89,538)

37.7%

Net Interest Income

68,358

-3.2%

-0.7%

77,593

-11.9%

138,962

9.4%

148,197

-6.2%

Non-interest income

88,539

198.7%

389.2%

29,440

200.7%

118,183

253.8%

59,084

100.0%

Profit before provisions

156,897

56.5%

80.4%

107,033

46.6%

257,145

60.3%

207,281

24.1%

Loan Impairment charges

(34,512)

337.6%

196.1%

(7,458)

362.7%

(42,398)

197.9%

(15,344)

176.3%

Total Expenses

(74,402)

54.5%

39.0%

(47,092)

58.0%

(122,564)

32.8%

(95,254)

28.7%

PBT

47,983

8.6%

120.3%

52,483

-8.6%

92,183

71.0%

96,683

-4.7%

Tax

(10,165)

51.7%

-21.1%

(8,499)

19.6%

(16,866)

-8.5%

(15,200)

11.0%

Tax rate

21.2%

602bps

-3799bps

16.2%

499bps

18.3%

-1591bps

15.7%

258bps

PAT

37,818

0.9%

325.2%

43,985

-14.0%

75,317

112.4%

81,484

-7.6%

Source: NSE, Investment One Research

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