Zenith Bank Plc. (9 months ended September 2014)
- Zenith Bank Plc (Zenith) reported 12% YoY (6M 14: +13%) rise in gross earnings toN273.4 billion for the 9 months ended September 2014. PBT was 8% higher YoY (6M 14: +3%) at N86.8 billion while PAT was 5% higher YoY (6M 14: +5%) at N71 billion.
NIR pegs back topline
- Q3 14 interest income of N73.5 billion was mildly lower QoQ but matched our estimates with asset yield and earning asset volumes coming in line with projections. In a repeating dynamic thus far amongst banks that have released Q3 14 results, Zenith’s asset growth was primarily driven by loans (+10% to N1.5 trillion) and securities (T-bills: +33%, HTM portfolio: +8%). However, non-interest revenue (NIR) disappointed, coming in 30% lower QoQ at N15.5 billion, 23% behind estimates. Both fee (-25%) and trading (-39%) income were significantly lower QoQ and the weakness in NIR as a whole was primarily responsible for gross earnings falling 5% short of estimates.
Cost improvements prevent damage to profits
- On a positive note, despite a 3% QoQ rise in funding base, interest expense contracted 9% QoQ to N20.9 billion, 5% ahead of our estimate. The disparate movement indicates an extension of the 2014 focus on cheaper funding with sequential quarterly step-downs in interest expense putting annualized WACF of 3.6% as at 9M 14, 90bps below year-start (-30bps QoQ).
- Opex came in flat for the second quarter running at N37.2 billion, 8% below our expectations which had anticipated increase in regulatory costs. This appeared to pan out as other opex increased 5% QoQ but that was offset by an 8% decline in personnel expenses. Annualised cost-to-income ratio dropped 20bps from 6M 14 to 55.2%.
- Impairment charges however doubled QoQ to N2 billion which we consider likely related to the wave of asset creation thus far in 2014. Nonetheless, absolute amount remains negligible with cost of risk unchanged from 6M at 0.3%, half our FY 14 estimate.
- Lower interest expense, in particular, helped offset revenue pressures and maintained Q3 14 PAT at N29 billion, flat QoQ and matching our estimates. PAT of N23.6billion was also flat QoQ but with tax charge 22% above our forecast was 6% behind our estimates. Corresponding PBT margin of 32% is 100bps higher than 6M 14 but lower by that same margin YoY while PAT margin of 26% is flat from 6M 14 but 200bps behind YoY.
Price declines restore BUY recommendation
- Zenith’s ability to sustain operating performance despite industry pressures remains a key positive in our view. Having closely tracked expectations for operating performance thus far, we envisage moderate revisions to our model. Perhaps more pertinently, pressures on market price, alongside the broader market, make Zenith’s valuation much more compelling than at our last review. Whilst current P.E of 7.5x (prev. 8.3x) and P/B of 1.4x (prev 1.6x) remain at premia to peers’ 6x and 1x respectively, justifiably so in our view. The expanded upside to our current FVE of N28.7 prompts us to a one-notch rating upgrade to STRONG BUY.
