Zenith's Q2 earnings were ahead of our forecasts, with the 13% yoy increase in pre-provision profits exceeding our estimates by 30%. The beat was mainly due to a sharp increase in trading/FX gains, which surged 3x and account for c30% of total revenues vs 11% in Q2 18. This, in addition to a 189% yoy increase in e-banking income, offset a 33% yoy drop in net interest income, as asset yields and loan volumes contracted. PAT was up by 12% yoy (15% beat), as a higher cost of risk of c3.0% (vs 0.7% in Q2 18 and our 0.6% forecast) was outweighed by a 6ppts decline in the effective tax rate to 29% (in line with our forecast). DPS of 0.30 came in as expected (flat yoy), implying a yield of 1.8%. Compared with Q1 19, PAT was down 23% yoy as weaker margins and increases in operating expense, cost of risk and effective tax rate more than offset the much higher non-interest income.
Maintain Buy with NGN40.00 TP and 153% ETR. Excluding Zenith’s trading/FX gains, which could be difficult to sustain, we consider its underlying Q2 19 performance to be weak, judging by its lower-than-expected margins and loan volumes. In our view, GTB’s Q2 19 performance was superior, due to its stronger core revenue trend, efficiency improvement and margin resilience. That being said, we do see scope for Zenith’s core performance to improve over the medium term, based on: 1) its robust capital and NPLs provisions coverage ratios, which should support loan growth; and 2) its growing retail banking franchise, which delivered lower deposit costs than what GTB achieved in H1 19, and should continue to support non-interest income. Zenith is our top Nigeria bank stock, and trades on FY 19f P/B of 0.7x vs frontier peers at 1.3x.
Loan volumes were flat and deposits were up 7% qoq (down 3% and up 3%, respectively vs end-FY 18), while investment securities were up 9% qoq (down 4% vs end-FY 18). For the Nigeria bank entity, headline gross loans/deposits was above the Central Bank of Nigeria's 60% minimum threshold at 63%, and should be even higher when retail and SME are given a 150% weighting. Stage 3 loans were down 8% qoq, resulting in a bad loan ratio of 8.5% (down 2.1ppts qoq) with NPLs provisions coverage of 90% (up 19ppts qoq).
|NGNmn||Q2 19||Q2 18||yoy||Q1 19||qoq|
|Net interest income (NII)||56,378||83,969||-33%||86,137||-35%|
|Net attributable profit||38,672||34,594||12%||50,134||-23%|
|Stage 3/gross loans||8.53%||**9.01%||10.60%|