ZENITH BANK PLC FY'17 - Strong trading gains mask huge provisioning

Strong trading gains mask huge provisioning                                                                     

ZENITHBANK released its FY’17 result, posting improved y/y performances across both top and bottom line – up 47% and 37% respectively. Although we had anticipated stronger earnings for the period given the already impressive performance as at 9M’17, Q4 earnings still came in much better than our estimate with FY’17 Gross Earnings and PAT coming in 10% and 14% ahead of our respective estimates. Particularly, we highlight marked deviation from our estimates across a few line items. Whilst Interest Income rose 23% y/y to ₦475 billion (Vetiva estimate: ₦469 billion), Non-Interest Income more than doubled y/y to ₦271 billion, beating our estimate of ₦211 billion and spurring a 47% y/y rise in Gross Earnings.                           

Given the 170bps rise in NPL ratio to 4.7% in FY’17, we are wary of loan loss expense pressure and anticipate some volatility from this end. Hence, we raise our loan loss provision estimate for FY’18 to ₦86 billion (Previous: ₦42 billion) – translating to a cost of risk of 3.9%. With the implementation of IFRS 9 earmarked for 2018, we highlight that management expects the adoption to lead to a c.₦42 billion reduction in shareholders’ fund.                                                                    

Whilst we maintain our 10% loan growth forecast for FY’18 (down 8% in FY’17), we expect the y/y moderation in interest rate environment to cap Interest Income growth. However, we expect trading income as well as improving transaction turnover to continue to support other non-interest income. Given anticipation of possible easing in 2018 and in line with recent rate moderations, we forecast moderation in cost of funds to ease interest expense pressure. Particularly, we expect the strong growth in customer deposit recorded in FY’17 (up 15% y/y) as well as the healthy liquidity and capital adequacy ratios to provide leeway for growth in risk assets in FY’18. Overall, we forecast a flat PAT of ₦180 billion for FY’18 – translating to an EPS of ₦5.73. With earnings coming in better than we had estimated, we raise our Target Price to ₦38.11 (Previous: ₦37.09). ZENITHBANK trades at P/E and P/B ratios of 5.4x and 1.1x vs. Tier I averages of 5.8x and 1.1x respectively.