ZENITHBANK: Healthy upside potential, even after mixed Q3


Tuesday, November 03, 2015 11:58AM / FBNQuest Research

6% average cut to our earnings forecasts:
Following Zenith Bank’s Q3 2015 results, we have reduced our 2015-16E earnings forecasts by around 6.0% on average, and our price target by a similar magnitude to N22.3. Relative to guidance at the start of the year, the outlook going into Q4 is subdued, off a slightly weaker-than-expected Q3 2015.

The fact that yields on FGN bonds and T-bills have moved down on the back of the 600bp cut to the CRR, more than compensating for the loss of TSA funds, is already impacting Zenith’s NIM (-40bps q/q).

Consequently, we have reduced our 2015E PBT forecast to N132bn from N144bn; the latter was close to management’s guidance of N145bn (raised from N127bn earlier in the year after a strong Q2 performance).

Notwithstanding, we expect the shares to continue to outperform the index in the near to medium term. Over the past three months they gained 11.5% vs ASI’s -3.5%. We see healthy upside potential (of 24.5%) from current levels, hence our unchanged Outperform rating.

Mixed Q3; PAT up 4.4% thanks to a tax rate of 6.1%:
Zenith’s Q3 PBT of N31.9bn grew 10% y/y but Q3 PAT came in higher at N32.9bn thanks to a boost (N3bn) from other comprehensive income (OCI). Nevertheless, PAT growth was just 4.4% y/y, less than the 10% on the PBT line, because the OCI was down -62% y/y.

Although profit before provisions (and opex) of N76bn grew by almost 12% y/y – thanks largely to a faster growing non-interest income (16% y/y) compared with funding income (9% y/y), this was matched by opex growth (12% y/y). To a lesser extent, a 31% y/y rise in loan loss provisions also contributed (the magnitude of the provisions was not significant, however).

Relative to Q2, although PAT grew 64% q/q, this was purely down to the positive impact of the OCI. Q3 PBT was down -19% q/q, driven by a -30% q/q decline in funding income. The latter proved significant, despite a 29% q/q increase in non-interest income and declines in provisions (-51% q/q) and opex (-11% q/q). Compared with our estimates, PBT was slightly behind, by 6.5%.

However, PAT beat by 13%, thanks to a combination of lower-than-expected taxes (-62%) and the OCI (we had forecasted zero on this line). Returning to the PBT, the slight weakness relative to our forecast was driven by funding income, similar to what we saw for the q/q trends. Non-interest income, loan loss provisions and opex all surprised positively.

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