Culled—-Proshare
August 16, 2016/FBNQuest Research
Healthy underlying results; raising price target by 2.7%
Zenith Bank management reiterated its full year PBT guidance of N126bn, following its Q2 2016 results which were in line. The main areas of scrutiny by the market in the results were the absence of large fx-related (naira devaluation) gains in non-interest income and a large increase in loan loss provisions.
The reason for the former is that Zenith management is conservative, and chooses not to run large open fx positions (even within the permitted range by the regulator).
As for loan loss provisions, accounting-related changes (modelling) led to marked increases in collective impairment. Management was adamant that potentially problematic exposures to government, power and oil & gas in particular did not pose the level of risk that the market may be worried about.
Oil production for the assets in question are up, some restructurings are taking place with hedges and the devaluation means that state government revenue allocation (in naira) are now higher.
When the dust settles, we expect the market to focus on the fact that the bank’s underlying results were satisfactory.
Although we have increased our risk free rate assumption by 200bps to 14.5%, our decision to raise our 2016E PBT forecast by 7% to N125bn (in order to bring it closer to management’s guidance) and our valuation being rolled over to 2017 lead to a 2.7% increase to our price target to N20.7.
Ytd, Zenith shares are up c.7% vs a loss of –c.5% for the ASI. We retain our Outperform rating.
Significant boost to PAT from OCI (fx-related) in Q2 2016
Zenith’s Q2 2016 PAT jumped 140% y/y to N48bn, largely due to a N30bn fx translation impact (overseas subsidiaries) following a c.30% naira devaluation. In contrast PBT fell -20% y/y driven by a combination of a weak profit before provisions results (-5% y/y) and loan loss provisions (+128% y/y); these more than offset a -6% y/y fall in opex. Both funding income (-1.6% y/y) and non-interest income (-14.3% y/y) were soft.
The latter stood out more 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, vs 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, overshadowing an 18% q/q growth in profit before provisions.
Although PBT was only 8% ahead of our forecast, PAT was double our forecast: compared with the N30bn on the other comprehensive income line, we forecasted zero.
