•Zenith Bank Plc released half year results for the period ended 30th June 2012. Revenue rose 23% YoY to N151.1 billion in H1 2012, 13% higher than our forecast. PBT and PAT rose a faster 36% and 32% YoY to N50.1 billion and N42.4 billion respectively, 18% and 42% ahead of our respective forecasts.
Figure 1: Trend in Quarterly Revenue and PAT
Interest income drives revenue growth
•The 39% YoY growth in interest income in H1 2012 corresponds with a 9% YTD expansion in its loan book, which already surpasses our 5% full year forecast and partly explains the variation between our revenue forecasts and actual.
•Conversely, non-interest income declined 9% YoY in H1 2012 but was nevertheless a significant improvement on the 30% YoY decline in Q1 2012 and underpinned by reported mark to market gains on trading assets.
Despite declines, trading assets likely provided support NIM expansion
•The 14% and 46% QoQ decline to N460 billion and N32 billion in Zenith’s Treasury bills and trading assets, respectively, probably masked earnings from these assets in Q2 2012. Considering intensifying competition and lower yields in the corporate loans market to which Zenith traditionally maintains substantial exposure, expansion in the bank’s NIM to 8.72% in H1 2012 from 7.52% and 8.34% in H1 2011 and Q1 2012 respectively, likely arose from government securities suggesting that the reduction in these positions came much later in the quarter and the interest income from these drove NIM expansion.
Figure 2: Trend in Annualized Net Interest Margin
Efficiency initiative continue to yield positive results as impairment charge slows
•In line with peers, Zenith’s operating costs were more contained in Q2 2012 reflecting a sharper QoQ jump in the base for the corresponding period in 2011 but probably also an industry-wide trend towards operational consolidation and revision of third-party supply contracts alongside other cost cutting measures. Operating cost rose 4% YoY in H1 2012 and was a significant deceleration from the 20% YoY in Q1 2012. Consequently, the 14% YoY rise in operating income was able to push the bank’s cost-to-income ratio lower to 55% from 57% and 60% in Q1 2012 and H1 2011, respectively.
•Zenith Bank booked N542 million in impairment charges in Q2 2012, bringing the H1 total to N1.7 billion compared to N3.9 billion in H1 2011. The reduction was likely aided by further loan recoveries in view of a 4bps reduction in NPL ratio to 3.3%. This puts the bank’s cost of risk under 0.4% well behind the 2% 2011 average which we used for our 2012 estimates and accounts for some of the variations in our PBT and PAT forecasts versus actuals even as our 30% effective tax charge, which was twice actual, weighed on PAT.
•Deposits rose 3% YTD to N1.7 billion to put Zenith’s loan-to-deposit ratio at 57% in H1 2012 ahead of the 54% over the preceding 6 months. 7% QoQ growth in loan book to N972 billion tracked ahead of the 2% QoQ in Q1 2012 suggesting a slightly more robust risk appetite but capital adequacy and liquidity ratios still stood at a healthy 27% and 62%, compared to 10% and 30% regulatory minima, leaving ample headroom for risk asset growth.
We account for yield on earning assets, efficiency and cost of risk differently
•Our previous FY 2012 deposit forecast matches the reported level. However, we annualized the 3% deposit growth in H1 2012 to 6% for FY 2012 and revise our deposit forecast accordingly to N1.75 trillion for FY 2012. We also expect the bank to maintain its current loan-to deposit ratio at 57% leading to an upward adjustment to our assumption to match this level. Consequently, we revise our loan book higher to N999 billion, implying a 9% and 14% rise from our previous forecast and Q4 2011, respectively.
•We revise our forecast for yield on earnings assets to 11% for FY 2012, 100bps higher than previous, to match annualized H1 2012 estimates. We consequently revise our FY 2012 revenue forecast to N328 billion; a 16% rise from our previous forecast.
•The improvement in cost-to-income ratio weighed on our decision to revise the ratio lower to H1 2012 levels at 55% from 57%. On the strength of current trends, we also envisage that the bank will be competitive with current industry leaders at 45% by 2014, which is a downward revision from our previous 50%.
•The bank’s recovery efforts have proved to be supportive in the low provisioning charges against risk assets for the bank. We incorporated the impact of this trend over last two quarters which sees our provisioning charge estimate decline 1pps to 0.9% for FY 2012.
Following these changes, we revise our PBT and PAT forecasts for FY 2012 higher by 27% apiece to N108 billion and N76 billion, respectively. The foregoing adjustments puts our estimated FY 2012 EPS at N2.63 while changes to our forecasts and assumptions, lead to a 10% rise in our fair value for Zenith Bank to N17.31 from N15.90; an 18% discount from the last close. The bank’s forward PE and P/Bv at 5.5x and 1.1x are at par with peer average. The revisions lead to an upgrade in our recommendation from neutral to OVERWEIGHT. Download Full Report Here
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