April 19, 2018/InvestmentOne Report
NIGERIA | EQUITIES | BANKING | ZENITH BANK PLC
Impressive net interest income of N95.9billion, up 69.7% q/q; 35.8% y/y
Profit before tax of N54.0billion, up 6.1% q/q; 22.2% y/y
Mixed profit after tax of N47.1billion, down 3.3% q/q; up 25.5% y/y
Zenith bank released its Q1 2018 results earlier today, which should a significant reduction in loan impairment charges, one of the major drivers of the bank’s bottom line perormance as gross earnings fell 21% q/q.
The bank reported a 6.1% q/q increase in PBT to N54.0billion driven by the 91.1% q/q drop in loan impairment charges and the 69.7% q/q jump net interest income, which more than cancelled out the 73.7% q/q decrease in non-interest income and 15.1% q/q rise in opex.
Lower yield environment supports net interest margin
In our opinion, we believe the slide in yields in the fixed income space was more than supportive of the bank’s cost of funds (4.1% as at Q1 2018 against 5.2% as at Q4 2017), which led to the rise in net interest margin to 9.3% as at Q1 2018 (9.0% as at Q4 2017) and the impressive net interest income performance.
Furthermore, the net interest income performance occurred despite the 9.5% q/q contraction in gross loans and advances as lending activities have yet pickup.
The contraction in yields was more supportive of Zenith bank’s results than GTB given the difference in funding mix. As at Q4 2017, Retail accounted for about 18% of Zenith bank’s total deposit while it accounted for about 50% of GTB’s total deposits.
Non-interest income performance less than inspiring
The bank’s uninspiring non-interest performance was due to the 99% q/q crash in FX trading and Treasury bill trading income. Similar to GTB, Zenith bank also posted FX revaluation gains, although down 37% q/q to N3.5billion.
We suspect that the bank may have reported some of its Treasury bill trading income as part of its interest income resulting in a less than inspiring non-interest income performance. However, we await management’s clarification on this.
Non-performing loans head south for now
Asset quality seemed to have improved in Q1 2018 as non-performing loans (NPL) ratio fell to 4.3% as at Q1 2018 from 4.7% as at Q4 2017. We believe that the slide in NPL ratio was slightly moderated by the decline in gross loans and advances.
Despite the slide in loan impairment charges, which was flattered by the high base effect of Q4 2017 when the bank increased provisioning on its 9mobile exposure, NPL coverage jumped to about 320% as at Q1 2018, from 144% as at Q4 2017.
However, we state that the bank’s NPL would have been much higher if its 9mobile exposure had been classified in Q4 2017, like other players in the sector, which would have resulted in a lower NPL coverage.
IFRS 9
The significant increase in NPL coverage was due to the implementation of IFRS 9, which resulted in a N138billion q/q increase in balance sheet provisioning that the bank transferred from retained earnings. We expect this to put downward pressure on the bank’s capital adequacy ratio.
During the Q4 2017 conference call, management stated the implementation of IFRS 9 could result in a decrease in CAR by as much as 200bps at group level. As at Q1 2018, Zenith bank’s CAR stood at 22.3% at group level.
Gross earnings stronger on a y/y basis
Compared to Q1 2017, there was a 22.2% y/y increase in PBT on the back of the 14.5% increase in gross earnings, due to the 35.8% y/y spike in net interest income, which offset the 10.4% y/y decrease in non-interest income. This combined with the 42% y/y decline in loan impairment charges more than outweighed the 32.7% y/y rise in opex.
Despite the improvement in gross earnings y/y, the surge in opex put upward pressure on the bank’s cost to income ratio, which inched up to 54.2% as at Q1 2018, against 52.1% as at Q1 2017, and outside of management’s guidance of 51.8% for FY 2018.
In the near term, we should see the bank’s top line performance continue to be supported by the interest income from treasury bills locked in during 2017. However, we highlight concerns regarding the bank’s non-interest and opex performance which could weigh on PBT.
ZENITH BANK Q1 2018 Figures. Year End 31 Dec. (N millions)
Q1 2018
Q/Q
Y/Y
Gross Earnings
169,192
-20.9%
14.5%
Interest Income
142,618
26.4%
20.8%
Interest Expense
(46,720)
-17.1%
-1.6%
Net Interest Income
95,898
69.7%
35.8%
Non-interest income
26,574
-73.7%
-10.4%
Profit before provisions
122,472
-22.3%
22.2%
Loan Impairment charges
(4,573)
-91.1%
-42.0%
Total Expenses
(63,898)
15.1%
32.7%
PBT
54,001
6.1%
22.2%
Tax
(6,922)
213.1%
3.3%
Tax rate
12.8%
848bps
-234bps
PAT
47,079
-3.32%
25.5%
Source: Company financials, Investment One Research
Recently Released Q1 2018 Banking Sector Results
NGN billion (unless stated otherwise)
Zenith
GTB
Key Income Statement Figures
Gross Earnings
169
109
Net Interest Income
96
60
Non-interest Income
27
28
Opex
-64
-33
Loan Impairment Charges
-5
-2
Profit Before Tax
54
53
Y/Y PBT Growth
22.2%
4.4%
EPS (kobo per share)
150
158
Key Balance Sheet Figures
Total Assets
5,676
3,507
Total Liabilities
4,941
2,972
Total Equity
735
535
Key Ratios
Net Interest Margin
9.3%
10.1%
Cost to Income
54.2%
30.8%
NPL ratio
4.3%
6.2%
Liquidity
70.5%
55.9%
Cost of Risk
0.9%
0.1%
ROE
24.2%
30.2%
ROA
3.3%
5.3%
Source: Company financials, Investment One Research
