Tuesday, August 15, 2017 10:38AM / FBNQuest Research
Maintaining Outperform rating following 37% increase to our PT
Zenith Bank’s (Zenith) Q2 2017 PBT surprised positively due to strong y/y growth in non-interest income which more than offset a subdued performance in funding income and negative surprises in loan loss provisions and opex.
A significant y/y growth in fx trading income driven by marked-to-market gains on swaps was the key driver behind the solid growth in non-interest income. While the weakness in funding income was due to elevated funding costs linked to high yield on government securities, impairments were significantly higher during the quarter, due to exposure to telecoms (mainly 9mobile, formerly Etisalat) and aviation (identity of corporate not disclosed).
Following the results, we have kept our funding income forecast broadly unchanged for 2017E but raised our cost of risk assumption by c.150bps to 3.2% (3%+ guid.). Nevertheless, we have raised our 2017E and 2018E EPS forecasts by an average of 17% to reflect the positive surprise in non-interest income and a stronger H2 outlook for the same.
This, combined with our decision to roll over our valuation to end-2018 and an upward revision to the cycle ROE assumption in our DCF to 20% (from 17.5% previously), explains the 37% increase in our price target to N29.1. Although Zenith Bank shares are up 59% ytd (vs. 41% ASI), our new price target of N29.1 implies additional upside potential of 24%. As such, we retain our Outperform rating on the shares.
Stellar PBT growth driven by y/y expansion in non-interest income
Zenith’s Q2 results showed that PBT grew by a remarkable 120% y/y to N48bn. The strong PBT growth was mainly driven by stellar growth of 389% y/y to N88.5bn on the non-interest income line. Growth on this line was underpinned by a strong performance in fx trading income which grew to N46bn from an fx loss in H1 2016. In contrast, funding income came in flat y/y.
The strong revenue contribution was strong enough to completely offset increases of 196% y/y and 39% in loan loss provision and opex respectively. Further down the P&L, PAT declined by 19% y/y to N31.4bn mainly because of a negative result of –N6.3bn in other comprehensive income line (OCI) compared with a strong gain of N30.2bn in Q2 2016 on the same line.
On a sequential basis, the results mirrored the y/y trends. PBT was up by 9% q/q. Again robust growth of N199% q/q on the non-interest income line was the key driver underpinning the q/q growth in PBT. PAT fell by -19% q/q because of the negative result on the OCI line.
1. Zenith Bank Plc H1 2017 Conference Call & Earnings Presentation - The Key Takeaways
2. Zenith Bank Plc H1 Results – Forward Hump Boosts Earnings
3. Zenith Bank Plc - Earnings Beat as FX Income Spike Dwarfs Huge Provision
4. Zenith Bank Plc: Net Interest Income Down by 3.2% QoQ in Q2 2017
5. Zenith Bank Reports Q2 2017 Results - Loan Loss Impairments and OPEX Spiked
6. ZENITHBANK Declares N75.32bn PAT in Q2 2017 Results, Proposes 25 Kobo Interim Dividend (SP:N24.00k)
7. ZENITHBANK Declares N37.49bn PAT in Q1 2017 Results, (SP:N14.9k)
8. ZENITHBANK Declares N129.6bn PAT in 2016 Audited Results; Proposes N1.77k Final Dividend,(SP:N14.73)
9. Zenith Bank Plc to Hold Board Meeting on January 24th, 2017
10. Zenith Bank Plc Records Slight Strong Q3 2016 Results; Maintains Outperform Rating
11. ZENITHBANK Declares N100.07bn PAT in Q3 2016 Result, (SP:N14.75k)
12. Zenith Bank Plc Earnings Update - More Prudence as Bank Adopts New Impairment Model
13. ZENITHBANK Half-Year Earnings Presentation: The key takeaways
14. Zenith Bank Plc Earnings Miss as Loan Loss Expense Pressures PAT
15. Zenith Bank Plc Records Group Capital Adequacy Ratio of 19% in Q2'16
16. Zenith Bank Reports Q2 2016 Results; Significant FX-Related OCI Gains Boosted PAT
17. Zenith Bank Plc Records Group Capital Adequacy Ratio of 19% in Q2'16
18. ZENITHBANK Declares N44.84bn PAT in Q2 16 Result Proposes 25k Interim Dividend SP N15.60k