ZENITH BANK PLC H1'17 Earnings - Earnings beat as FX income spike dwarfs huge provision

​ZENITH BANK PLC                                                   
Earnings beat as FX income spike dwarfs huge provision                                           
ZENITHBANK released its audited H1’17 result posting marked deviations from our expectations across most line items. Notably, following a 58% q/q rise in Gross Earnings in Q2’17 standalone, the top line rose 77% y/y to ₦380 billion for the H1’17 period – beating our ₦282 billion estimate. Particularly, despite a 3% decline in loans and advances, Interest Income rose 45% y/y to ₦262 billion (Vetiva: ₦226 billion) – supported by a strong interest rate environment. In the same vein, Interest Expense spiked 127% y/y to ₦123 billion following a significant uptick in cost of funds (H1’17: 6.4% vs. H1’16: 3.2%) – coming in higher than our ₦89 billion estimate. More conspicuously, Non-Interest Income rose to ₦118 billion (H1’16: ₦34 billion) – dwarfing our ₦55 billion estimate. Particularly, the bank recorded an FX trading income of ₦46 billion – largely driven by income from forward contracts within the period.      

Amidst rising NPL ratio (H1’17: 4.3% vs. Q1’17: 3.2%), ZENITHBANK reported a significant rise in loan loss provision, up 198% y/y to ₦42 billion vs. our ₦16 billion estimate. Despite this, Operating Income rose 47% y/y to ₦215 billion – 22% ahead of our ₦176 billion estimate. Surprisingly however, Operating Expense rose substantially in Q2’17, up 54% q/q – a trend management attributed to inflation and currency pressure despite a relatively more stable FX environment and a sticky down inflationary trend within the period. Notwithstanding, PAT rose to ₦75 billion – beating our ₦65 billion estimate.                                             

We have updated our model to reflect the marked deviations across most line items. Whilst we cut our loan growth forecast for FY’17 to a mild 2% (Previous: 8%), we raise our Interest Income estimate to ₦535 billion (Previous: ₦452 billion). Also, following the outperformance in H1’17, we revise our Non-Interest Income higher to reflect the spike in FX income from forwards and futures transaction recorded in Q2’17. Overall, our PAT forecast is raised to ₦143 billion (Previous: ₦131 billion). Given the earnings outperformance, we revise our target price to ₦30.73 (Previous: ₦28.00). Although we have seen a strong rally in the stock in recent time (ytd return: 63%), we believe the bank remains largely undervalued. ZENITHBANK trades at FY’17 P/B: 1.0x and P/E: 5.8x vs. Tier I banks’ average P/B: 1.1x and P/E: 5.8x respectively.