Culled—-Proshare

August 12, 2016/Vetiva Research

• Strong Q2 top line up 16% q/q, 10% ahead of Vetiva estimate
• Loan loss doubles, up to N14.2 billion
• Devaluation supports credit growth, up 15% ytd
• Board of Directors declare N0.25 interim dividend

PAT bows to higher provision and tax
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.

However, in line with recent industry trend, loan loss expense doubled y/y to N14.2 billion – following a Q2’16 standalone provision of N11.6 billion (Q1’16: N2.6 billion) and translating to a CoR of 1.3%.

Despite the modest q/q rise in Non-Interest Income for Q2’16, the income line remained significantly weaker y/y for H1’16 – pressured by the N864 million trading loss recorded vs. the N12 billion gain reported in corresponding period of 2015. With Operating Expense coming just in line with our N82 billion estimate, (4% better y/y), PBT came in at N63.3 billion (in line with our N63.7 billion estimate).

However, given that the dividend declared in FY’15 (N56.5 billion) was higher than taxable profit, ZENITHBANK’s tax was assessed on the dividend declared (minimum tax provision), resulting in an additional tax of N16.95 billion. Consequently, with an estimated H1’16 tax of N18.4 billion, PAT (N44.8 billion) was down 16% y/y and 14% behind our N52.3 billion forecast.

TP revised to N26.40 (Previous: N27.46)
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.