Modupe Gbadeyanka
Zenith Bank recorded a 44.57 percent growth in interest income in H1-17. On our 12.98 percent estimated assets yield, we believe the run rate will be sustained for the rest of the year, equating to 36.38 percent y/y growth in interest income to N524.46 billion.
The bank’s portfolio of investment securities, treasury bills, and quality loan books will be catalysts of the growth in assets yield. We also forecast NIR to surge by 51.16 percent to N186.60 billion, buoyed by strong trading income, revaluation gains, and marginal write-back of previous provisions.
Overall, we forecast a 39.97 percent growth in gross earnings to N711.06 billion in 2017F.
That said, PBT and PAT growth will be muted, owing to the impact of the elevated cost of refinancing maturing FCY obligations, higher impairment provisioning on transportation (specifically the aviation sector), communication and general commerce exposure, and a surge in total operating expenses (opex).
In a bid to meet maturing FCY obligations during the year, Zenith Bank issued the second tranche of its $1 billion Global Medium-Term Note Programme established in 2014. The programme was completed in May and the bank successfully raised $500 million (at a coupon rate of 7.375 percent, a 113bps premium over the first tranche).
The bank’s balance sheet as at H1-17 ending reveals that FCY borrowings worth $593.80 million (KEXIM $16.44 million, ABSA Bank $151 million, JP Morgan $75.05 million, Standard Bank $273.83 million, First Rand Bank $6.52 million, Citi Global Markets $51.96 million, and BACA $18 million) are due for maturity between May and October 2017.
We believe both the Eurobond and the newly secured borrowings during the year (SMBCE $49.75 million and AFC $181.9 million) came at higher cost relative to the maturing loans (mostly concessional borrowings) having estimated weighted average rate of 5.15 percent.
Accordingly, and given the continued tight domestic interest rate environment, we expect cost of funds to expand 125 bps y/y to 5.40 percent in 2017F – translating to interest expense of N235.88 billion.
However, we expect the stronger expansion in asset yields will offset the growth in funding cost, thus, we forecast an uptick in net-interest margin by 25 bps to 7.65 percent.
In H1-17, Zenith Bank made a 30 percent provision on its exposure to 9 Mobile (formerly Etisalat Nigeria) which resulted in a surge in credit loss provision (COR rose to 3.6 percent, from 1.3 percent in Q1-17 and H1-16) to N42.40 billion. Though we acknowledge the fact that a haircut is eminent on the syndicated exposure to 9Mobile, it is our understanding that most of the provisions booked in H1-17 by Zenith Bank was on its bilateral loan to the telco and not entirely on its share as a part of the syndicate.
Despite the bank restructuring 11.8 percent of its gross loan in H1-17(with oil & gas exposure representing 10.1 percent of the restructured exposure) as well as declassified some power exposure (down to 1.0 percent from 43.0 percent in FY-16), NPL still rose to 4.3 percent (N99.19 billion) from 3.0 percent (N71.37 billion) in FY-16, as the bank classified 37.6 percent (vs. 1.5 percent in FY-16) and 27.4 percent (vs. 18.5 percent in FY-16) of its transportation and general commerce exposure as NPL.
Overall, for 2017F, we estimate Zenith Bank’s NPL to increase to 4.50 percent, from 3.00 percent in FY-16 and 4.30 percent in H1-17, and cost of risks to rise to 2.68 percent, translating to a credit loss provision of N77.13 billion in 2017F.
We estimate opex to rise 29.63 percent y/y to N226.24 billion in 2017F (driven largely by higher regulatory levies on operating expenses) – translating to a 415 bps y/y expansion in CIR to 56.84 percent and growth in operational leverage to 4.5x (from 4.0x in FY-16).
Accordingly, we expect the impact of the increase in opex to limit the trickling down effect of the rise in gross earnings – we estimate PBT and PAT to rise 9.61 percent and 8.28 percent to N171.81 billion and N140.38 billion, respectively.
While acknowledging the impressive performance across income lines in H1-17, which resulted in an upward revision in earnings for the year, we believe the revaluation-bloated growth in NIR will taper in 2018, and factoring in the impact of the adoption of IFRS 9 from 2018 (with management guiding to a 20 percent impact on credit loss provision and 1 percent drop in CAR), we now expect PAT to grow lower than previously estimated over 2018F-2019F.
Hence, we revise our target price on the stock downward to N27.18 (Previous: N30.63), translating to 13.26 percent upside from current price of 24.00 (as at 21/08/2017).
Zenith Bank is currently trading at 2017F P/BVPS of 1.0x (above peer average of 0.9x and below the 5-year average of 1.1x) and P/E of 5.6x (above peer average of 5.2x and below the 5-year average of 5.9x). HOLD.
