Friday, May 08, 2020 / 02:51 PM / FBNQuest
Research / Header Image Credit: BusinessAM Live
7% reduction to our price target
We keep our Outperform rating on Zenith Bank (Zenith), but make a -7% downward adjustment to our price target to N44.6, implying a potential upside of 193% from current levels. In contrast to the cut to our price target, we have increased our 2020E EPS forecast by 4% because the bank's Q1 PAT came in c.5% ahead of our forecast because of a positive result of N12bn in other comprehensive income. As such, despite the upward revision to our earnings forecast, our new price target is lower because we have increased the equity risk premium driving our DDM assumption to 7.5% from 6.0% previously.
Contrary to management's 2% loan growth guidance for the year, Zenith's loan book grew strongly by 12% q/q. Although the adjustment of the fx rate - used to convert foreign-denominated risk assets - to N383 / US$ (from N363 in Q4 2019) contributed to the strong loan growth, we estimate that organic loan growth was much stronger at c.8% q/q (vs c3% q/q for the former). Consequently, we have increased our 2020E loan growth forecast to 13% from c.2% previously. Following additional provisions taken for new loans under IFRS 9, Zenith's impairment allowance for credit losses grew by 89% y/y, translating to a 10bp increase in the cost-of-risk to 0.6%.
Consequently, we have increased the cost-of-risk assumption driving our loan loss impairment forecast by c. 30bps to 1.3%. Our new forecasts imply a 6% y/y increase in the bank's 2020E PBT to N256.9bn, slightly ahead of guidance of N253bn. At current levels, Zenith Bank shares are trading on a 2020E P/B multiple of 0.4x for 21.8% ROAE in 2021E, or a discount of 4% to the 0.5x average multiple for 16.1% ROAE that the sector is trading on.
Q1 PAT up 43% y/y, thanks to OCI of N12.0bn
Zenith Bank's pre-provision profits advanced by 8% y/y, driven by strong double-digit growth of 43% y/y in non-interest income. The stellar growth in non-interest income was underpinned by increases of 98% y/y and 339% y/y in trading income (derivatives) and fx revaluation gains respectively. In contrast, funding income declined by -5% y/y, reflecting downward pressure on net interest margin due to the subdued interest rate environment. The growth in pre-provision profits completely offset a 10% y/y rise in opex and a significant spike in impairments for credit losses respectively.
As such, PBT grew by 3% y/y to N58.8bn. Below the tax line, PAT advanced by 43% y/y to N62.5bn, thanks to a positive result of N12.0bn in other comprehensive income. Sequentially, PBT and PAT declined by -12% q/q and -11 q/q respectively because of a 19% q/q increase in opex.
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