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Zenith: H1 19 earnings call – key takeaways

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tellimer Research
    22 August 2019
    Published by

    Zenith held its earnings call yesterday, following the release of better-than-expected audited H1 19 results (see our Q1 19 and Q2 19 earnings review reports). Compared to Zenith, we think GTB's Q2 19  performance was superior, given the latter's more resilient margins, cost/income ratio improvement, and stronger core revenue base (see GTB call notes). 

    Five key takeaways from Zenith management's comments on the call are:

    1. Management is bullish on margins improving in H2

    Despite a 1.5ppt yoy decline in H1 19 NIM to 8.6%, management guides 9.0% for the full year. The improvement in H2 is expected to come from better balance sheet management (Q2 was reportedly constrained by CBN’s 60% LDR floor directive), supported by the achieved reduction in funding costs. 

    Management also suggested that the decline in interest income on T Bills in Q2 was related to/offset by the spike in trading income. Considering the volatility in NIMs and trading income for Zenith, we noted its revenue/assets ratio, which fell 0.4ppt yoy to 8.5% in H1, vs 10.3% for GTB and 7.4% for FBNH

    2. Loan volumes were impacted by write-offs, and should rise in subsequent quarters

    The write-offs (3% of gross loans) relate to fully provisioned NPLs across several sectors, and match the ytd dip in the gross loan balance. Management expects some recoveries on these write-offs.

    Maintaining a bullish outlook on loan growth for H2, the bank continues to guide to growth of 7.5% for the full year, with sights on opportunities in upstream oil & gas and retail/SME in particular. 

    CBN’s focus on driving bank lending is in sync with Zenith’s internal strategy of restructuring towards a higher risk asset contribution, based on management's statements. For the Nigeria bank entity, the LDR was 63% at end-H1 before applying a 150% weighting for retail/SME, which is above CBN’s 60% floor. 

    3. Perceived asset quality risks are low

    The bank expects cost of risk to moderate in H2 19, and guides to 1.0% for the full year (vs 1.4% achieved in H1) on both lower impairment charge and loan growth. Similarly, the NPL ratio is expected to fall to 4.85% by end-FY 19 from 5.30% at end-H1, according to management's estimates.  

    Management verified that some provisioned loans are not defined as NPLs, which partly explains the 3.2ppt variance between the stage 3 (based on IFRS) and NPL (based on CBN guidelines) ratios. While restructured loans accounted for 13% of gross loans, NPL provisions coverage was strong at 145%.  

    On a sector level: 1) oil & gas NPLs fell 34% ytd due to write-offs, and accounted for 76% of restructured loans; 2) exposure to oil importers has been resolved through government promissory notes and loan loss provisions, and the impact of interest income suspension on those has been recognised; 3) telecommunications had a major delinquent name which was classified in Q2 (and is fully provisioned); and 4) manufacturing required further provisioning and was a key driver of the cost of risk in Q2, but should stabilise going forward.

    4. Retail penetration momentum is also attributable to its strong corporate brand 

    According to management, customers’ perception of Zenith as an aspirational bank has contributed to its positive reception in the retail segment. This sentiment has supported targeted activity such as product launches, increased marketing and the removal of a minimum balance requirement for new accounts. In H1, Zenith acquired c800k new customers and issued c1.2mn additional cards, which drove a surge in group e-banking income. 

    Retail deposits contribution improved to 29% from 23% at end-FY 18, while loans contribution remained low at c2% despite a 55% ytd growth. Management aims for a 40% deposits contribution for the segment. 

     5. Zenith will defend its position as a top-tier lender

    Management was clear that maintaining the bank’s position as one of the largest lenders in Nigeria is key to the board. 

    To this end, acquisition opportunities will be considered, but the preference is to continue to grow organically. A solid capital buffer currently in place should support loan growth and possible acquisitions as opportunities emerge.  

    On FCY funding, the bank considers its liquidity to be sufficient to meet current lending needs, and will base a return to the Eurobond market on further prospects for FCY lending. There has also been a steady increase in domiciliary account deposits (27% of total) largely from corporates, which at an average rate of 2-3%, also contributed to the moderation in funding costs. 

    Zenith had a net long US$ position of US$300mn and swap position of NGN1.6bn at end-H1.  

    With the exception of changes made to NIM, cost of funds and LDR, management's initial FY 19 guidance was maintained.

    Zenith management guidance

    Source: Company presentation

    Reiterate Buy on Zenith with an unchanged NGN40.00 TP suggesting an ETR of 146% based on: 1) its robust capital and NPLs provisions coverage ratios which should support loan growth; and 2) its growing retail banking franchise, which supports funding costs and non-interest income. Zenith is our top Nigeria bank stock, and trades on FY19f P/B of 0.7x vs frontier peers at 1.0x.