ZENITHBANK Q3’17: Q3 2017 results highlight: Slide in loan impairment charges supports PBT amidst weaker earnings

October 20, 2017/InvestmentOne Research

NIGERIA | EQUITIES | BANKING | ZENITH BANK PLC 

Q3 2017 results highlight: Slide in loan impairment charges supports PBT amidst weaker earnings 

·         Net interest income of N62.53bn, down  -8.5% q/q; -0.4% y/y  

·         Profit before tax of N60.37bn, up +25.8% q/q; down -10.4% y/y 

·         Profit after tax of N53.92bn, up +42.6% q/q; down -16.5% y/y   

Yesterday afternoon, Zenith Bank released its Q3 2017 results which showed a +25.8% q/q increase in PBT to N60.4bn, which was +25.0% above our estimate.

The bank’s performance was largely driven by the -86.5% q/q decline in loan impairment charges and the -34.4% q/q slide in opex, which combined to more than offset the -8.5% q/q decrease in net interest income and the -42.1% q/q drop in non-interest income.

In scrutinizing the numbers further, we highlight that the significant decline in loan impairment charges was flattered by the high base effect of Q2 2017, when the bank took a collective impairment on its 9mobile (formerly Etisalat) exposure as well as some specific provisioning.

Furthermore, the reduction in provisioning may also not be unconnected with the relative stability in asset quality, with non-performing loans (NPL) ratio relatively flat at 4.20% as at Q3 2017, while NPL coverage dripped to 110% as at Q3 2017, against 117% as at Q2 2017.

While opex was also flattered by the high base effect of Q2 2017, when the bank took the remaining of its FY2017 AMCON levy, after adjusting opex is down -16.3% q/q, which would have contributed to the decline in cost to income ratio to 52.90% as at Q3 2017, from 57.1% as at Q2 2017.

With this said, non-interest income was weighed down by the N17.6bn FX trading loss, against the N46.2bn FX trading income in Q2 2017, which more than offset the +183% q/q spike in T-bill trading income. We point out that the impressive T-bill trading income maybe due to the moderation in yields towards the end of Q3 2017 combined with 72% of the bank’s total T-bill position (c.N720bn) held for trading, compared with just 13% as at Q4 2016.

Compared to Q3 2017, PBT fell by -10.4% as the -10.8% y/y slide in net interest income and the -16.3% y/y decline in non-interest income cancelled out the -39.0% y/y reduction in loan impairment charges while opex was relatively flat y/y.

Going forward, the recent moderation in yields in the fixed income space could be a negative for net interest income growth, as loan book growth is likely to remain muted in the near term. This combined with the volatility seen in FX trading may weigh on the potential benefits from a further decline in yields on T-bill trading income and consequently, PBT and ROE.

While our models are under review, we rate ZENITH shares BUY.

ZENITH BANK Q3 2017 figures (N millions)

Q3 2017

Q/Q

Y/Y

I-one est.

Actual vs I-one est.

9M 2017

Y/Y

I-one est.

Actual vs

  I-one est.

Gross Earnings

150,826

-35.2%

-8.9%

158,974

-5.1%

531,266

39.7%

539,414

-1.5%

Interest Income

99,532

-31.0%

-4.5%

124,719

-20.2%

361,789

26.6%

386,976

-6.5%

Interest Expense

(37,002)

-51.2%

-10.8%

(54,604)

-32.2%

(160,297)

67.2%

(177,899)

-9.9%

Net Interest Income

62,530

-8.5%

-0.4%

70,115

-10.8%

201,492

6.2%

209,077

-3.6%

Non-interest income

51,294

-42.1%

-16.3%

34,255

49.7%

169,477

79.0%

152,438

11.2%

Profit before provisions

113,824

-27.5%

-8.3%

104,370

9.1%

370,969

30.4%

361,515

2.6%

Loan Impairment charges

(4,655)

-86.5%

-39.0%

(8,734)

-46.7%

(47,053)

115.3%

(51,132)

-8.0%

Total Expenses

(48,800)

-34.4%

-0.6%

(47,358)

3.0%

(171,364)

21.2%

(169,922)

0.8%

PBT

60,369

25.8%

-10.4%

48,278

25.0%

152,552

25.8%

140,461

8.6%

Tax

(6,451)

-36.5%

133.5%

(7,492)

-13.9%

(23,317)

10.0%

(24,358)

-4.3%

Tax rate

10.7%

-1050bps

658bps

15.5%

-483bps

15.3%

-220bps

17.3%

-206bps

PAT

53,918

42.6%

-16.5%

40,787

32.2%

129,235

29.1%

78,286

65.1%

Source: NSE, Investment One Research

 

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