EUR 3.48 For Business Accounts Only

Initial View - Zenith Bank Plc FY 2017: A Chicken and Egg Situation

• Full-year 2017 result of Zenith Bank (Zenith) showed EPS growth of 37.2% YoY to N67 (2016: N4.13) largely on the back of strong growth in non-interest revenue (+119.2% YoY to N270 billion) which masked elevated loan loss provision (+203.6% YoY to N98.3 billion). The bank declared a final dividend of N2.45, which alongside interim dividend of N0.25 translates to total dividend of N2.70. At current pricing, final dividend translates to a yield of 8%.  
• Possible haircut on 9mobile exposure? Over Q4 2017, Zenith booked ~ N52 billion in impairment (9M 17: N47 billion) with Cost of Risk expanding by 8.8pps QoQ to 9.7%. In ascertaining the driver for the higher impairment, breakdowns provided by Zenith throws up higher impairment (specific) to ICT and Oil & Gas sectors over H2 2017 by 1724% and 233.8% accordingly. While we await management clarification on the assets in both sectors, our findings suggest that the sale of 9mobile resulted in a discount to market value. Consequently, in line with IFRS, the bank must have taken a haircut of ~40% on its exposure to the telecoms firm. Non-performing loans (NPL) printed at 4.7% (+50bps QoQ) with Oil & Gas, General Commerce and Transport contributing ~37%, 28% and 16% in that order.  
• Non-interest Revenue boosted by trading income. As earlier stated, the key driver for the earnings growth, despite higher impairment, was the non-interest revenue (NIR) which expanded over two-fold YoY. Over the Q4 2017, NIR expanded 97% QoQ with much of the jump growth in earnings emanating from trading income (+362% QoQ). First off, the bank reported treasury bills income of N36 billion like prior quarter (N34 billion) which reflects trading income from its swap position (Notional value: $1.5 billion). Irrespective, much of the improvement in NIR stemmed from FX trading income of N39 billion (Q3 17: FX trading loss of N6 billion).
• $250 million net-long position drives FCY gains. Further supporting the jump in NIR was the N5 billion booked in the quarter, stemming from FCY revaluation gains on its net FCY position which our estimate puts at $250 million. The gains reflected revaluation of its FCY position at the NIFEX rate (N330/$) from prior CBN rate (N305/$).
• Eurobond coupon payment weakens funding cost. Despite a 13% expansion in interest income with asset yields rising 35bps QoQ to 8.5% (stemming from interbank placement and loans), Zenith funding cost worsened over Q4. Interest expense jumped sharply by 52% QoQ with cost of funds (WACF) expanding by 142bps QoQ to 5.0%. Looking through the breakdowns, funding cost pressure emanated from interest expense on borrowed funds which jumped 230% QoQ to N47 billion. From our analysis, the jump in interest expense on borrowed funds emanated from coupon payment on its $500 million Eurobond issued in May 2017 and first coupon payment due in November 2017. Consequently, Net Interest Margin (NIM) contracted by 100bps QoQ to 5.0%. Overall, despite higher NIR, the impact of decline in net interest income (-9.6% QoQ) and higher impairment (+999% QoQ) dipped EPS in Q4 by 9.7% QoQ to N55 (Q3 17: N1.72).
• The Bank will be holding a conference call Tomorrow, Wednesday March 14 at 2pm Lagos Time (1pm London/ 3pm Johannesburg/ 9am New York). Click here for conference call details.
• Zenith is trading at a P/B of 1.19x which is at a discount to peers of 1.7x - ROE of 21.7%. Our last communicated FVE on Zenith Bank is N37 which translates to an OVERWEIGHT rating on the stock. We will revisit our numbers after further analysis and discussion with management. 

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