August 11, 2016/FBNQuest Research
Event: Zenith Bank reports Q2 2016 results
Implications: Underlying results (PBT) tracking in line with full year guidance (N126bn)
Positives: Significant fx-related OCI gains boosted PAT; underlying results healthy
Negatives: Marked y/y increase in loan loss provisions
Zenith Bank’s Q2 2016 results which were published this afternoon show a significant y/y growth (140%) in PAT to N48bn. In contrast the y/y change in PBT was -20% y/y. The boost to the PAT came from fx-related gains on the back of the devaluation of the naira (c.30%) on the other comprehensive income line (N30bn in Q2 alone). This relates to translation effects from foreign subsidiaries.
The fall in PBT was driven by a combination of a c.-5% y/y decline in profit before provisions and a 128% y/y increase in loan loss provisions to N11.7bn; these more than offset a -6% y/y decline in opex. Returning to the profit before provisions line, both funding income (-1.6% y/y) and non-interest income (-14.3% y/y) contributed to the decline.
The latter stood out more as the magnitude of the declines show, due to a poor performance on trading income, and to a lesser extent, fees and commission. Sequentially, the picture was similar: PAT grew 80% q/q, compared with a PBT decline of -3% q/q.
In this instance the impact of loan loss provisions (+352% q/q) and opex (+14% q/q) proved detrimental and overshadowed a healthy 18% q/q growth in profit before provisions. Compared with our estimates, although PBT was only slightly ahead, by 8%, PAT was double our forecast because of the other comprehensive income result. Compared with the N30bn on the OCI line, we forecasted zero.
As with several of the banks which have reported Q2 results, the impact of the naira devaluation has proved significant, distorting the bottom line. Further devaluation since end-June implies that more OCI gain is likely for Zenith when it reports Q3 results.
However, focusing on the underlying results, the run-rate of the PBT implies that the bank is running in line with management’s full year PBT guidance of N126bn and consensus (N129bn). Given the material gains some of the other banks have recorded on the non-interest income line from trading income, the market is likely to be slightly disappointed that this is absent in Zenith’s results.
However, as aforementioned, the translation gains more or less make up for this on the OCI line. The only other point that will give the market some concern is the loan loss provisions line. Although we do not believe the q/q increase in provisions (relative to revenue delivered) justifies the concern, we understand why it will draw some scrutiny.
The loan loss provision figure of N11.7bn was significantly higher than our N4.4bn estimate. Having said that, profit before provisions beat our forecast by 16%, and in naira terms by more than the difference we see between the reported N11.7bn and our N4.4bn estimate.
Zenith is proposing an interim dividend of 25kobo as we expected. The yield is less than 2%.
On the back of these results, we would expect consensus full year PBT to remain broadly unchanged. As such, we expect a neutral reaction to the results once the market gets over the disappointment of the absence of fx-related gains on the non-interest income line and the negative surprise in loan loss provisions.
Year to date, Zenith shares are up 11% vs ASI’s -4.7%. Our estimates are under review. We rate Zenith shares Outperform.
Zenith Bank Q2 2016 results: actual vs. FBNQuest Research estimates (N millions)
