Zenith Bank Plc Records Slight Strong Q3 2016 Results; Maintains Outperform Rating


Wednesday, October 26, 2016/ 5.15pm /FBNQuest Research

Unchanged 2017E earnings estimates and N20.7 price target
We have made limited changes to our 2017E earnings forecasts for Zenith, following its better-than-expected Q3 2016 results. Fx revaluation gains were significant for the first time in Q3, leading to the strong results more than offsetting negative surprises in opex and interest expense.

Both expense lines saw marked increases because of inflation (impact of naira devaluation on FCY-denominated costs). The market has largely ignored the strong fx gains since the results were published.

Notwithstanding, since 2017E estimates should be closer to a true reflection of underlying results (without fx-related disruptions), we continue to find the shares undervalued. Our price target of N20.7 (unchanged) implies a potential upside of 39% from current levels.

Compared with rival GT Bank which is trading in the 1.3-1.4x P/B range, Zenith is trading at a 50% discount. We expect this valuation gap to narrow over the next year. We reiterate our Outperform rating. 

Fx-related gains visible for the first time in Q3 results
Zenith’s Q3 2016 PBT of N58bn grew 82% y/y while PAT grew much faster, by 151% y/y to N83bn, thanks to a significant result on the other comprehensive income (OCI) line (boosted by fx translation gains). The main driver behind the strong growth in PBT was non-interest income of N61bn (+125% y/y).

Net interest income grew by 29% y/y. As a result, although both loan loss provisions and opex saw marked increases of 202% y/y and 40% y/y respectively, the revenue growth more than offset these trends.

Sequentially, the non-interest income line stood out again, with a 239% q/q increase. Unlike Q2 when non-interest income disappointed because fx revaluation gains were largely absent, in Q3 the gains were very visible at N28bn, slightly over 45% of the total other-income result.

The only other positive driver was a -35% q/q decline in loan loss provisions. Both opex (+32% q/q) and net interest income (-9% q/q) weighed on the results.  Relative to our forecasts, net interest income missed by 10% due to a surge in interest expense (+46% q/q).

However, non-interest income was extremely strong, beating our forecast by 231%. As such, profit before provisions was ahead by 40%. Loan loss provisions also surprised positively, coming in 11% below our forecast. These positives more than offset a higher-than-expected (+26%) opex, to lead PBT comfortably ahead (+73%) of our expectations. PAT beat our forecast by 128% because of the strong OCI result.

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