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Lower impairment, harbinger of 2018 earnings

• Zenith Bank Plc (Zenith) released its audited FY 18 result yesterday with EPS expanding 11% YoY to N6.16 (below our estimate of N6.72), largely on the back of strong declines in interest expense (-33% YoY to N144 billion) – which masked the 7% YoY decline in interest income to support 15% YoY growth in net interest income – and loan loss provision (-81% YoY to N18 billion). The bank declared a final dividend of N2.50, which alongside interim dividend of N0.30 translates to total dividend of N2.80 (FY 17: N2.70). At current pricing, final dividend translates to a yield of 10% (FY 17: 8%).

• NIMs moderates in Q4 despite strong FY 18. As earlier stated, while yields on assets contracted 162bps YoY to 8.1% over FY 18, the contraction in WACF by 217bps YoY to 3.1% supported 15bps expansion in NIM to 5.4%. However, over the last quarter of 2018, the contraction in asset yields intensified to more than outweigh the moderation in WACF, which depressed NIMs by 128bps QoQ to 6.0%. Much of the decline in interest income (-8.5% QoQ to N100.9 billion) emanated from lower interest on loans (-13% QoQ) and bonds (-19% QoQ). The moderation in interest on loans largely reflects the year to date decline in loans to customers by 13.2%.

• Non-interest Revenue bottomed out in 2018. NIR declined by 31% YoY to N179.9 billion over FY 18, largely on the back of loss in the bank’s FX trading position of N16.7 billion (FY 17: N68.7 billion) and lower operating income (-20% YoY to N17.9 billion). However, Q4 18 standalone, NIR grew 6% QoQ to N44.4 billion largely on the back of higher trading income (+69% QoQ to N27.3 billion) and 426% QoQ growth to N6.7 billion.

• Lower impairment provisions, harbinger of 2018 earnings. In line with the development over the first nine months of the year, loan loss provision ended the year significantly lower by 81% YoY to N18.4 billion (2017: N98 billion), with associated cost of risk contracting 367bps YoY to 1%. However, despite our expectation of a higher provisioning over Q4 following haircut on the resolution of 9Mobile, Zenith recorded additional loan loss provision of just N4 billion over the quarter with cost of risk of 0.9%.

• Reflecting the moderation in operating income by 8.7% over 2018, cost to income ration expanded by 453bps to 47.4%, while actual operating expenses grew 0.94% YoY with most of the decline emanating from the slowdown in Q4 (-17% QoQ to N43 billion). Overall, while operating expenses and slight moderation in loan loss provision was a positive in Q4, the material contraction in net interest income and higher effective tax rate over the period drove a 21% QoQ decline in EPS to N1.57 over Q4 18.

• Our take. Overall, while the performance was impressive over the full year, we note the weakness in core earnings over Q4 18. However, given the faster decline in loan loss provisions compared to our estimates of N26 billion we expect a positive reaction to bank in the interim.

• Our last communicated FVE on Zenith Bank is N38.83 translates to a STRONG BUY rating on the stock. We will revisit our numbers after further analysis and discussion with management.

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