Yesterday, GTBank released its first-quarter result for 2018 which showed its interest income dropped by 3.95% to N80.77bn (N84bn in 2017) and a slight increase in net income by 7.7% to N44.67bn up from N41bn reported in 2Q1, 017. This compares to the 50.6% growth in interest income recorded last year when the yield on TB surged to an all-time high of 22%.
The result isn’t a surprise as the federal government looks to cut domestic borrowing on the back of a lower cost on foreign borrowing, a decision that isn’t unconnected to the massive drop in interest on fixed income securities to less than 13%.
While this fall is expected to pose a great threat on bank’s profitability in 2018, Zenith bank is showing no sign of slowing down as the bank’s recent first quarter result, released today, showed impressive performance on key figures.
As culled from Proshareng.com
This afternoon, Zenith Bank (Zenith) published its Q1 2018 results. PBT of N54bn grew 22% y/y and puts the bank on track to meeting its full year target of N210bn in our view. Revenue growth was mixed: funding income grew 36% y/y while non-interest income fell -10% y/y. Notwithstanding, total revenues grew by a healthy 22% y/y and helped to offset a 33% y/y rise in opex. A -42% y/y reduction in loan loss provisions also helped. PAT grew faster than PBT (by 33% y/y) because of a helping hand from other comprehensive income (N4.8bn), thanks mainly to fx translation gains.
The bank’s earnings were close to our forecasts. We are surprised at the revenue split, however. The q/q changes are material: 70% in magnitude for both. We suspect some reclassification is at play here. As such, we choose not to place too much emphasis on the separate revenue lines, but the total revenue instead which was in line with our forecast. Q1 results are not audited. As such, we also would not make too much of the differences between the opex and provisions figures compared with ours for now.
On the balance sheet, a -16% q/q decline in the loan book is a major surprise. Zenith’s loan book has now declined, consistently, from a peak of N2.3trn in Q1 2017 as non-interest income and govt securities have been preferred to lending. The bank guides to loan growth of 10% for the full year. With govt yields continuing to trend down, loan growth will have to pick up substantially over the coming quarters.
On the back of these results, we would not expect a significant change to consensus estimates (FY2018 PBT of N199bn). We expect the market’s reaction to be muted. We continue to believe that the bank can meet its FY PBT guidance of 2018 of N210bn. Our estimates are under review. We rate Zenith shares Outperform.
Let’s also look at the key ratios I use to analyse banking stocks:
- Return on equity increased from 5% in Q1, 2017 to 6% in 2018.
- Return on asset increased from 0.7% to 0.8%
- Net interest margin also grew to 4.2%, up from 2.4% in Q1, 2017.
- Efficiency ratio also improved to 35%, from 38% in Q1, 2017, despite an increase in operating expenses, the bank is able to increase operating efficiency.
- Impairment charge also reduced significantly to N4.8bn, from N7.8bn, 38% reduction
- EPS also grew significantly by 26% to N1.5, from N1.19.
- PE ratio of Zenith bank is 4.74 which is remarkably cheap compared to the industry average.
- Using a minimum expected EPS growth rate of 10% Year on Year and PE of 4,74, PEG ratio is 0.47, the stock looks cheap.
The result so far is expected to attract positive sentiment which should drive the bank’s share to the upside, I recommend a buy as we look forward to the second quarter result.
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