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Zenith Bank’s Q2-2018 result shows decline across major income lines

Zenith Bank Plc released its Q2-2018 result Monday afternoon at the floor of the Nigerian Stock Exchange (NSE), indicating a decline across major income lines, which resulted in a 34.25% y/y and 9.56% q/q drop in Gross earnings.

Interest income was 40.31% down from the corresponding period last year, and lower by 39.66% q/q. The decline offset a 63.08% y/y and 40.09% q/q decline in interest expense, resulting in net interest income falling by 15.06% y/y and 39.45% q/q in the quarter.

Besides, the overall, pre (-1.19%) and post-tax (-26.38%) profits were lower q/q, and while PBT was up 11.20% y/y, PAT lower by 8.36%, following an increase in effective tax rate to 35.05%, from 21.18% in the previous year. Meanwhile, a higher dividend of NGN0.30 was declared, compared to H1-2017 (NGN0.25).

Improved cost of funds salvages NIM, despite a poorer yield on assets: Cost of funds, on an annualized basis, was significantly lower, by 300 bps y/y, at 3.4%. This was largely attributable to cheaper deposits, as interest paid on deposits in H1 dropped sharply by 63.72% y/y to NGN37.88 billion, despite a 6.42% y/y increase in customer deposits. In particular, interest paid on time deposits declined significantly by 306.19% y/y to NGN22.8 billion, amidst continued decline in interest rates.

On interest income, earnings on loans and advances in the first half was down by 18.0% y/y to NGN146.43 billion, amidst 14.36% y/y drop in loans and advances to customers (YtD: -10.82%) to NGN1.87 trillion. Overall, thanks to an impressive improvement in the CoF, NIM sustained growth (+150 bps y/y), at 10.1%., despite drop in analysts estimated yield on assets by 263 bps to 12.71%.

The results also revealed the bank’s inability to sustain growth in its trading income thus far this year, with a derivatives loss of NGN18.59 billion reported in the review period, against the income of NGN46.42 billion in H1 last year.

However, overall, trading income in Q2 was robust at NGN35.10 billion, from NGN1.71 billion recorded in Q1.

Analysts say this is largely attributable to the NGN55.09 billion recorded as treasury bills trading income, from a nil position in Q1. However, year on year, the trading income was lower by 39.76%, owing to the loss sustained on the derivatives line.

Whereas quality of assets remain stable, amidst continued decline in impairment loss provision, provision for impairment loss, on a year-on-year basis, dipped further in Q2 by 85.09% to NGN5.15 billion.

As a result, cost of risk improved by 270 bps to 0.9%, against 3.6% in H1-2017. A 20 bps uptick in NPL ratio to 4.9%, was more-than-sufficiently pacified by the 8,580 bps increase in the coverage ratio to 229.2%, against 143.4% in FY-17.

CAR is lower by 600 bps Year to Date: On its audited financial statement, the Group’s CAR stood at 21%, 600 bps lower than the 27% recorded in FY-2017. However, CAR stands a notch higher than the 19.9% estimated in the unaudited Q1-2018 result. The improved CAR estimate is likely attributable to the reduced deduction for initial implementation of IFRS 9 from retained earnings (-21.73%) to NGN108.12 billion, against NGN138.13 billion in Q1. The Group’s CAR remains well-above regulatory requirement of 16%.

Market pundits posit that with a further decline in the Loan-to-Deposit ratio to 53.5%, against 60.5% in FY-2017, and a still-healthy NPL ratio (although higher than a 5-year average of 2.91%, it remains below the CBN’s tolerable limit of 10%), amidst continued impact of declining loans on interest income (as discussed earlier), Zenith Bank could, in the long run, consider a moderate growth in its loan books, amidst relatively improved macroeconomic conditions.