October 19, 2017/Cordros Research
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Zenith Bank Plc (ZENITHBANK) published Q3-2017 result this afternoon, reporting declines across most line items – gross earnings declined 35.19% q/q and 8.89% y/y – following higher than expected contraction in interest income (-30.96% q/q and +4.54% y/y) and a steep decline in non-interest revenue (42.07% q/q and 16.29% y/y). ZENITHBANK’s annualized EPS rose 41.32% to N1.71, above consensus estimate of N1.08.
The q/q decline in interest income (28.87% below our estimate) was on the back of lower interest on loans and advances to customers (-37.455 q/q and -18.27% y/y), interest income on treasury bills (-22.83% q/q), and bonds (-4.23% q/q and -22.95% y/y), resulting in a 134 bps y/y contraction in annualized asset yield to 10.04% – a development we attribute to the negative base effect of the asset re-pricing and translation impact of FCY interest income which supported funding income in the previous year. On the other hand, interest expense declined 10.78% y/y and 51.19% q/q, broadly reflecting a significant decline on interest on time deposits (74.29% q/q and 41.79% q/q), resulting in 37 bps y/y decline in annualized cost of funds to 4.00%. Overall, annualized NIM contracted 96 bps to 6.34%.
Also, the relative stability of the naira – which limited the legroom for significant revaluation gains such as those reported last year – largely accounted for the huge drop in NIR. The decline was further exacerbated by a N17.63 billion foreign exchange trading loss in Q3-17, which masked the surge in treasury bill trading income (+182.96% q/q and 1151.07% y/y).
Over 9M-17, asset quality deterioration persists, with NPL ratio rising 200 bps y/y to 4.20% (albeit below the 4.30% in H1-17), while additional provisioning of N4.67 billion in Q3-17 further pushed cost of risk 140 bps higher to 2.70%, following specific provision on bilateral exposure to Etisalat (now 9 Mobile) and collective allowance for impairment on exposures to the general commerce, transportation, oil & gas, and power sectors.
On the positive, total opex declined 16.51% y/y and 34.41% q/q (15.29% below our estimate) in Q3-17, following moderations in personnel expenses (-13.72% y/y and -2.85% q/q) and operating expenses (-21.19% y/y and -47.75% q/q), the cumulative impact of which offset the 20.31% y/y and 7.80% q/q increase in depreciation and amortization.
Specifically, over 9M-17, ZENITH’s gross earnings is up 39.68% (supported by 26.6% and 79% increase in interest and non-interest incomes) while PBT and PAT are both ahead by 25.79% and 29.14% respectively. Accordingly, EPS is ahead of last year’s by 29.14% to N4.12.
While acknowledging the strong performance over 9M-17, the contraction across lines in Q3-17 would likely drive downward review of consensus 2017 estimates. Based on our last TP of N27.19, at 3.58% premium to the current market price of N26.25, we have a HOLD recommendation on the stock. Our estimates are under review.
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