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ZENITH BANK PLC - Earnings miss as loan loss expense pressures PAT

• ZENITHBANK’s H1’16 results showed weaker than expected bottom line. Whilst performances across most line items came in just in line with our expectation, higher loan loss expense and a higher tax expense were the key pressure points. Recovering from a relatively weak top line performance in Q1’16, Gross Earnings was 16% stronger q/q in Q2’16 (10% ahead of our Q2 standalone estimate) amidst improvement in both Interest and Non-Interest Income. Despite a 9% q/q rise in Interest Expense in Q2’16 (largely pressured by the higher interest rate environment), the expense line was contained at N54 billion for H1’16 vs. H1’15: N64 billion. Consequently, Net Interest Income rose 13% y/y N127 billion – 11% ahead of our N115 billion estimate.
• We have reflected the surprising rise in loan loss expense by raising our FY’16 CoR forecast to 1.1% (Previous: 0.5%). With loan portfolio up 15% ytd (due to devaluation impact), we revise our loan growth forecast to 18% (Previous: 6%). In all, we are impressed with the improved top line performance observed in Q2’16 and expect the higher yield environment to continue to support earnings. Finally, we revise our tax rate upward to 22% (Previous: 18%) to account for the minimum tax liability provision.