Zenith Bank’s H1 earnings ride on FX momentum to beat analysts forecast
Zenith Bank Plc, Nigeria’s second biggest lender by market capitalisation, has posted a profit after tax of N75.32 billion for the first half ended June 30 2017, 112 per cent increase from the profit recorded in corresponding quarter of last year.
Analysts had expected lower earnings for the tier-1 lender for the half year.
The growth in profit was driven by strong performance of the banks trading income that rose over 5,000 per cent to N65.32 billion, the highest growth since 2013. The bank sustained a trading loss amounting to N864 million in the first half of 2016.
Analysis of the bank’s audited financial statement released on the Nigerian Stock Exchange last week showed that income from foreign exchange trading comprised 71 per cent of gross trading income.
Ebenezer Onyeagwu, deputy managing director, Zenith Bank, said in a media chat on Friday that the bank leveraged its strong liquidity position capture value for shareholders.
“We maintained huge liquidity buffers in both foreign currency and the local currency to derive value from trading on some derivative products in the market,” said Onyeagwu. “What we are continuously looking for niche opportunities that can help us extract value from the huge liquidity we have.”
Interest income rose 45 per cent in the period to N262.26 billion in the period, but was subdued interest expense that spiked 127 per cent on the back of cost of time deposits. The bank’s net interest income increased by 9 per cent in the period.
The operating environment of lenders in Africa’s biggest economy has been tough as the federal government contuse to borrow at high interest rates that have seemed to crowd out lending to the private sector.
“The high interest environment has put pressure on our interest income,” Onyeagwu explained.
Analysts at Lagos-based CSL Stockbrokers alluded to the possibility of a different cause of the rise in interest expense.
“We do not believe the high interest rate environment can totally account for this growth,” said CSL analysts in a ‘quick take’ report released on Zenith’s result last Friday.
Fee and commission income grew 23 per cent year over year (yoy) on the back of fees on electronic products and to a smaller extent, credit related fees and commissions on agency and collection services.
Source: Cashcraft Asset Management; BusinessDay Analysis
Impairments were up 198 per cent year yoy, while cost of risk (COR) increased significantly to 3.6 per cent.
“This compares to our 1.5% estimate for financial year 2016,” said CSL. “This may be due to Zenith’s exposure to some local Oil & Gas companies.”
Analysts said that Zenith still has significant exposures to Seplat (US$241m) and Aiteo (US$295m). The bank also has significant exposure to Etisalat.
On the value of loan loss provision and impairment, you recognise that we have been operating in a very challenging environment and Zenith is not isolated, Onyeagwu said.
So what we have done is to recognise the impact of the recession. And the fact that some specific sectors of the economy have experienced some level of deterioration, so we felt it was a prudent thing to do.
Onyeagwu maintained a positive expectation for the bank’s performance in the second half of the year.
“We think it’s sustainable. We will continue to do what we’ve been doing, maintain the strong liquidity buffer,” he said. “Our capital adequacy ratio is strong and the liquidity buffers are also very strong to take up emerging opportunities.”
The bank declared an interim dividend of 25 kobo, in line with market expectations.
We expect a much higher dividend at the end of the year, CSL analysts said. “We have a buy a buy rating on Zenith Bank.”
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