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ZENITH BANK PLC H1'18 - Earnings Lag Marginally As Weak Interest Income Weighs

Earnings lag marginally as weak interest income weighs                                                                             

Following the audit of its half year result, ZENITHBANK released its financial statements for the period - posting mixed performances across major line items. Although bottom line came in behind our estimate following a much weaker Q2’18 performance, the bank declared a ₦0.30 per share dividend for the half year period beating our ₦0.25 per share estimate. Following an impressive start to the year, we had expected Q2’18 to come in modestly strong – albeit at a slightly weaker run rate. The second quarter performance however came in much weaker than we estimated. Particularly, Gross Earning was down 10% q/q after a strong 152% q/q rise in Non-Interest Income was unable to offset the impact of a 40% q/q moderation in Interest Income. We highlight that the weaker Interest Income for the Q2’18 period came despite a 7% q/q growth in loan portfolio.                                                                     

We have updated our model and revised our estimates to reflect the earnings deviation in H1. Notably, whilst we cut our loan growth forecast to -5% (previous: flat) and revise our Interest Income forecast lower to ₦459 billion (Previous: ₦515 billion), we revise our Non-Interest Income forecast to ₦202 billion (Previous: ₦136 billion) – in line with H1’18 trend. Overall, our Gross Earnings estimate is raised modestly to ₦661 billion (Previous: ₦651 billion). Also, following a significant y/y moderation in cost of funds to 3.4% (H1’17: 6.4%), we cut our Interest Expense forecast significantly to ₦151 billion (Previous: ₦187 billion). Furthermore, with Loan Loss Expenses coming largely in line with our estimate, we maintain our provisioning at ₦19.8 billion for 2018 – translating to a cost of risk of 1.0%. Consequently, our Operating Income line is raised to ₦491 billion. However, with our Operating Expense raised higher to ₦242 billion – translating to a cost to income ratio of 51% and our effective tax estimate raised to 21% to reflect H1’18 run rate, we estimate a PAT of ₦197 billion (Previous: ₦182 billion) for FY’18. Overall, we revise our Target Price to ₦35.11 (Previous: ₦34.22). ZENITHBANK trades at forward P/E and P/B ratios of 3.8x and 1.0x vs. Tier I averages of 5.1x and 1.0x respectively.