Zenith Bank Reports Q2 2017 Results – Loan Loss Impairments and OPEX Spiked


August 10, 2017/FBNQuest Research

Event: Zenith Bank reports Q2 2017 results

Implications: Upward revisions to consensus full year PBT forecasts likely

Positives: PBT up 120% y/y, driven mainly by a 389% y/y growth in non-interest income

Negatives: Funding income was flat y/y; loan loss impairments and opex spiked

This afternoon Zenith Bank (Zenith) reported Q2 2017 results which showed that PBT grew by a remarkable 120% y/y to N48bn. The strong PBT growth was mainly driven by a stellar growth of 389% y/y to N88.5bn on the non-interest income line. Growth on this line was underpinned by a strong performance in fx trading income which grew to N46bn from an fx loss of -N496m in 2016. In contrast, funding income came in flat y/y.

The strong revenue contribution was strong enough to completely offset increases of 196% y/y and 39% y/y in loan loss provision and opex respectively. Further down the P&L, PAT declined by 19% y/y to N31.4bn mainly because of a negative result of –N6.3bn in other comprehensive income line (OCI) compared with a strong gain of N30.2bn in Q2 2016 on the same line.

On a sequential basis, the results mirrored the y/y trends. PBT was up by 9% q/q. Again, robust growth of N199% q/q on the non-interest income line was the key driver underpinning the q/q growth in PBT. PAT fell by -19% q/ because of the negative result on the OCI line. Compared with our forecasts, PBT beat by 22%. However, PAT was broadly (-4%) in line with our N32.8bn forecast.

In terms of the H1 performance, PBT and PAT expanded by 71% y/y and 8% y/y to N92.2bn and N70.3bn respectively. Although both revenue lines contributed to the strong results, non-interest income which grew by 254% y/y was the major driver. The y/y growth on the funding income line was 9% y/y. The company is proposing an interim dividend of N0.25 which is flat y/y and in line with our expectations. The proposed dividend translates to a dividend yield of 1.0% and a payout ratio of 11.2%.

While the strength of the non-interest income result will be welcomed, we believe the weakness on the funding income line and the spikes in impairments and opex will also attract investors’ attention.

On funding income, it appears that Zenith also may have struggled to capitalise (effectively) on the elevated yields in the fixed income market because sourcing deposits may have been trickier, and the workings of the NAFEX fx market may also have led to a loss of funds from customers. Its deposits fell -1% q/q. Pending comments from management, we believe that the bank may have capitalised on the strong set of results to book significantly higher provisions. It is not clear why opex jumped 55% q/q.

Zenith’s H1 PBT tracks well ahead of consensus FY 2017 PBT forecast of N165bn. As such, we expect to see marked upward revisions to consensus PBT forecast. The shares have outperformed the Index this year. They have gained 62.7% ytd vs. 41.8% ytd for the ASI.

We rate the shares Outperform. Our estimates under review.

Conference call details: yet to be circulated

Zenith Bank Q2 2017 results: actual vs. FBNQuest Research estimates (N millions)