Report

Pressure Points Dissipate

  • Zenith Bank Plc (Zenith) released unaudited nine-months 2018 results which showed marked recovery in prior year pressure points, funding cost and impairment charge. Thus, earnings ran ahead of our expectation as funding cost contracted 192bps YoY to 3.3% while impairment charge declined 70% YoY to N3 billion with annualized cost of risk printing at 1.0% (-186 bps YoY). Consequently, despite weaker gross earnings, EPS expanded 11.6% YoY to N4.59. ROAE and ROAA printed at 25.7% and 3.5% respectively, an increase of 250bps and 11 bps relative to 9M 17.
  • Non-Interest Revenue steam out. NIR declined by 20% YoY to N5 billion largely on the back of a loss in the bank’s derivative position and lower operating income (-32.6% YoY to N11.3 billion). Precisely, reflecting mark-to-market on its derivative position as it nears maturity, the bank reported a loss of N20.8 billion in the period relative to a gain of N28.8 billion in 9M 17. Consequently, Cost to Income ratio advanced higher by 390 bps YoY to 50.1%.
  • Funding cost pressure takes a bow. Funding cost over the period dipped by 192bps YoY to 3.3% reflecting a significant decline in the bank’s interest expense (-31% YoY to N5 billion). Sifting through the breakdown, the drop reflected a massive decline in interest expense on term deposits which moderated by 69.5% YoY to N32.9 billion. Importantly, CASA as a share of total deposit almost touched the 70% mark in Q3 18 as it expanded by 548 bps YTD to 69%. Like GTB and UBA, asset yield came under pressure, declining by 125 bps YoY to 10.5%. Nonetheless, the moderation in funding cost was able to tame the weakness as NIM advanced higher by 53 bps YoY to 7.1%.

 

  • Q3 earnings on point. Contrary to Q3 earnings of UBA and GTB, Zenith’s Q3 stand-alone earnings showed a strong topline and bottom line performance. For context, despite sizable increase in funding cost (+28% QoQ to N8 billion) and lower NIR (-37.3% QoQ to N42 billion) over the quarter, the trio impact of higher interest income (+28.3% QoQ to N110.4 billion), lower operating expenses (-21.8% QoQ to N52 billion) and impairment charge (-10.3% QoQ to N4.6 billion) saved the day with PBT expanding 12.4% QoQ to N59.9 billion. The impact of this saw PAT almost double Q2 earnings with EPS expanding 80.2% QoQ to N1.99.
  • Our take. Overall, Zenith’s performance was quite impressive, and we believe earnings would outmatch our expectations for FY 18E on the back of moderation in funding cost and lower impairment charge. For context, our FY 18E impairment charge of N74 billion is notably ahead of 9M 18 run-rate even as interest expense forecast runs ahead of current run-rate. However, our major concerns are possible uptick in provision to 9mobile in Q4, risk asset creation, outstanding derivative position and sustainability of earnings in 2019. We would be seeking management clarity on these concerns.
  • Our last communicated FVE on Zenith Bank is N25 which translates to a STRONG BUY rating on the stock. We will revisit our numbers after further analysis and discussion with management.
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ARM Securities Limited
ARM Securities Limited

ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape. ​

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