Economy
Zenith Bank Plc: Earnings Beat as Forex Income Spike Dwarfs Huge Provision
By Vetiva Research
- High interest rate environment lifts top line despite flat loan growth
- Elevated OPEX and Interest cost persist
- Provision in Power and Telecom assets pressure asset quality
Marked deviations from estimates as earnings beat
Zenith Bank released its audited H1’17 result posting marked deviations from our expectations across most line items. Notably, following a 58% q/q rise in Gross Earnings in Q2’17 standalone, the top line rose 77% y/y to ₦380 billion for the H1’17 period – beating our ₦282 billion estimate.
Particularly, despite a 3% decline in loans and advances, Interest Income rose 45% y/y to ₦262 billion (Vetiva: ₦226 billion) – supported by a strong interest rate environment. In the same vein, Interest Expense spiked 127% y/y to ₦123 billion following a significant uptick in cost of funds (H1’17: 6.4% vs. H1’16: 3.2%) – coming in higher than our ₦89 billion estimate.
Consequently, Net Interest Margin moderated 40bps y/y to 7.7% (Q1’17: 8.7%). More conspicuously, Non-Interest Income rose to ₦118 billion (H1’16: ₦34 billion) – dwarfing our ₦55 billion estimate.
Particularly, the bank recorded an FX trading income of ₦46 billion – largely driven by income from forward contracts within the period. Also, T-bills trading income rose significantly to ₦18.8 billion from ₦2.2 billion in the prior year.
Fee and commission income growth however came in more modest, up to ₦38 billion from the ₦31 billion recorded in H1’16.
Amidst rising NPL ratio (H1’17: 4.3% vs. Q1’17: 3.2%), ZENITHBANK reported a significant rise in loan loss provision, up 198% y/y to ₦42 billion vs. our ₦16 billion estimate. According to management, the increase in impairment charge was largely driven by higher provisioning across the Power and Telecoms sectors.
We recall that ZENITHBANK had the highest exposure to Etisalat and believe the bank must have taken a conservative approach to make provision for a portion of their exposure to the telecoms company.
Despite this, Operating Income rose 47% y/y to ₦215 billion–22% ahead of our ₦176 billion estimate.
Surprisingly however, Operating Expense rose substantially in Q2’17, up 54% q/q – a trend management attributed to inflation and currency pressure despite a relatively more stable FX environment and a sticky downward inflationary trend within the period.
Notwithstanding, PAT rose to ₦75 billion – beating our ₦65 billion estimate.
We highlight that ZENITHBANK restated its prior year’s profit, expensing an AMCON levy of ₦9.4 billion which had previously been capitalized.
Hence H1’16 PAT was restated to ₦35.5 billion (Previous: ₦44.8 billion).
Overall, the Board declared an interim dividend of ₦0.25 per share – same as prior year and in line with our estimate.
Earnings revised higher on higher interest rates
We have updated our model to reflect the marked deviations across most line items. Whilst we cut our loan growth forecast for FY’17 to a mild 2% (Previous: 8%), we raise our Interest Income estimate to ₦535 billion (Previous: ₦452 billion) – supported by the strong interest rate environment.
Similarly, we raise our Interest Expense forecast for FY’17 to ₦245 billion (Previous: ₦178 billion), pressured by the elevated funding cost.
Also, following the outperformance in H1’17, we revise our Non-Interest Income higher to reflect the spike in FX income from forwards and futures transaction recorded in Q2’17. Despite the raise, we remain conservative about the persistence of this income line in the coming quarters and taper down the run rate for the year.
Driven by the impairment in asset quality observed over the second quarter, we double our loan loss provision expectation for FY’17 to ₦66 billion (H1’17: ₦42 billion) – translating to a cost of risk of 2.9%. Furthermore, in line with the trend observed in Q2’17, we raise our Operating Expense estimate to ₦254 billion (Previous: ₦191 billion). Overall, our PAT forecast is raised to ₦143 billion (Previous: ₦131 billion).
We revise our target price to ₦30.73 (Previous: ₦28.00)
Whilst we see the recent uptick in NPL ratio (H1’17: 4.3% vs. Q1’16: 3.2%) as a pressure point for earnings in the coming quarters following the restructuring of Etisalat’s loan exposure and the subsequent takeover, we highlight ZENITHBANK’s impressive liquidity and capital ratios.
With capital adequacy and liquidity ratios of 21% and 61% (regulatory benchmark of 15% and 30%) respectively, we believe the bank is well positioned to take advantage of the market opportunities.
Given the earnings outperformance, we revise our target price to ₦30.73 (Previous: ₦28.00). Although we have seen a strong rally in the stock in recent time (ytd return: 63%), we believe the bank remains largely undervalued. ZENITHBANK trades at FY’17 P/B: 1.0x and P/E: 5.8x vs. Tier I banks’ average P/B: 1.1x and P/E: 5.8x respectively.
Source: Vetiva Research
By Dipo Olowookere
The Nigerian Exchange (NGX) Limited was further pulled back by 0.50 per cent on Tuesday as a result of profit-taking in some heavyweight stocks.
Like the preceding session, the key sectors of Customs Street were depressed yesterday, with the banking index down by 2.82 per cent. The consumer goods declined by 0.52 per cent, the insurance space lost 0.10 per cent, and the energy counter shrank by 0.03 per cent, while the industrial goods segment was flat.
Consequently, the All-Share Index (ASI) eased by 1,437.54 points to 241,984.80 points from 243,422.34 points, and the market capitalisation contracted by N922 billion to N155.204 trillion from N156.126 trillion.
The worst-performing stock was International Energy Insurance, which gave up 10.00 per cent to close at N5.76. Vitafoam dipped by 10.00 per cent to N189.00, Austin Laz crashed by 9.93 per cent to N3.90, SUNU Assurances depleted by 9.82 per cent to N3.58, and Sovereign Trust Insurance lost 8.37 per cent to finish at N2.30.
On the flip side, Conoil gained 9.79 per cent to trade at N213.00, Prestige Assurance also expanded by 9.79 per cent to N1.57, Neimeth jumped 9.74 per cent to N8.45, eTranzact chalked up 9.40 per cent to close at N16.30, and Cornerstone Insurance improved by 9.09 per cent to N5.40.
The bourse witnessed heavy sell-offs in some equities, with Sterling Holdings recording the sale of 100.9 million units worth N782.8 million to lead the activity log. UAC Nigeria transacted 49.4 million units valued at N9.1 billion, Access Holdings sold 28.8 million units for N699.3 million, Zenith Bank exchanged 29.4 million units worth N3.0 billion, and GTCO traded 20.2 million units valued at N2.7 billion.
At the close of transactions, market participants bought and sold 535.5 million shares worth N36.8 billion in 55,123 deals compared with 569.1 million shares valued at N31.4 billion traded in 77,652 deals on Monday. This implied that the trading value went up by 17.20 per cent, while the trading volume and the number of deals went down by 5.90 per cent and 29.01 per cent, respectively.
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange was further down by 0.48 per cent on Monday, June 16, as a result of the losses printed by three bellwethers, led by MRS Oil Plc, which fell by N15.80 to N142.20 per unit from N158.00 per unit.
Further, FrieslandCampina Wamco Nigeria Plc dipped by N2.94 to close at N180.14 per share versus the previous day’s N183.08 per share, and Central Securities Clearing System (CSCS) Plc crumbled by 38 Kobo to N80.24 per share from N80.62 per share.
Consequently, the market capitalisation of the trading platform moderated by N12.55 billion to N2.605 trillion from N2.605 trillion, while the NASD Unlisted Security Index (NSI) weakened by 20.98 points to 4,333.35 points from 4,354.33 points.
During the trading day, the value of transactions surged by 16.5 per cent to N45.6 million from the preceding session’s N39.2 million, and the number of deals soared by 34.8 per cent to 31 deals from 23 deals, while the volume of securities declined by 30.6 per cent to 688,290 units from 992,164 units.
At the close of trades, Great Nigeria Insurance (GNI) Plc remained the most traded stock by value on a year-to-date basis with a turnover of 3.4 billion units valued at N8.4 billion. The second spot was occupied by Infrastructure Credit Guarantee (Infracredit) Plc, with 2.3 billion sold for N6.5 billion, and the third position was taken by CSCS Plc, with 66.9 million units exchanged for N4.6 billion.
GNI Plc also ended the session as the most traded stock by volume on a year-to-date basis, with 3.4 billion units worth N8.4 billion, followed by Infracredit Plc with 2.3 billion units traded for N6.5 billion, and Resourcery Plc with 1.1 billion units transacted for N415.7 million.
By Adedapo Adesanya
The Naira suffered a 0.55 per cent or 91 Kobo loss against the US Dollar in the Nigerian Autonomous Foreign Exchange Market (NAFEX) on Tuesday, June 16, closing at N1,357.18 /$1 compared with the previous day’s N1,356.27/$1.
It also weakened against the Pound Sterling at the official market during the session by N11.53 to trade at N1,820.39/£1 versus Monday’s rate of N1,808.86/£1, but appreciated against the Euro by N2.06 to quote at N1,573.79/€1 versus the preceding session’s N1,575.85/€1.
In the black market, the Nigerian currency crashed against the Dollar yesterday by N5 to sell for N1,385/$1, in contrast to the N1,380/$1 it was traded a day earlier, and at the GTBank FX desk, it traded flat at N1,373/$1.
Nigeria’s gross external reserves surged to $50.505 billion, the highest international Dollar balance since January 2009, affirming expectations that the local currency will remain along a stable band. The FX reserves position was buoyed by inflows from oil sales.
In its Article IV consultation report on Nigeria, the International Monetary Fund (IMF) said that the Naira remains significantly undervalued despite recent gains from FX reforms. It noted that its Real Effective Exchange Rate (REER) assessment showed the local currency was still trading below levels supported by the country’s economic fundamentals, saying the Naira should have traded around N1,142.04/$1 using the end-of-2025 exchange rate benchmark, or N1,130.88/$1 when calculated using the average exchange rate for the year.
As for the cryptocurrency market, prices showed renewed risk appetite as total 24-hour trading volume jumped 51 per cent to $207 billion, open interest rose 2.4 per cent to $113.41 billion, and liquidations surged 64 per cent to $561 million, with shorts accounting for the bulk of the forced exits, according to Coindesk data.
Cardano (ADA) slid 2.7 per cent to $0.1731, Binance Coin (BNB) slumped 1.6 per cent to $605.80, Ripple (XRP) declined by 1.5 per cent to $1.22, Bitcoin (BTC) fell 0.8 per cent to $65,739.70, Dogecoin (DOGE) also tumbled by 0.6 per cent to $0.0873, and TRON (TRX) depreciated by 0.6 per cent to $0.3166.
However, Ethereum (ETH) grew by 0.5 per cent to $1,795.40, and Solana (SOL) rose by 0.2 per cent to $73.81, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) remained unchanged at $1.00 apiece.
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