Zenith Bank Q2 2020 Results Review: Compelling Valuation at Current Levels


Thursday, September 10, 2020 / 11:58 AM / by FBNQuest Research / Header Image Credit: The Sun Nigeria


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7% increase to our price target

Zenith Bank's Q2 2020 PBT missed our forecast because of a negative surprise in loan loss provisions which overshadowed positive surprises in funding and non-interest income. Similar to banks that have reported their Q2 results, Zenith's impairment charges for credit losses almost doubled (1.7x) y/y due to higher anticipatory provisioning arising from the economic disruptions due to the pandemic. In terms of asset quality deterioration, the most affected sectors were the oil & gas and general commerce segments whose share of the NPL bucket increased by 969bps and 285bps q/q to c.41% and 12% respectively.


Given the positive surprise in funding income, we have made modest upward revisions of about 2% on average to our 2020-21E funding income forecasts. However, the changes to our non-interest income forecasts are negligible because a large proportion of the gain was on the back of fx revaluation gains  of N22bn in H1 2020. We have increased our 2020E and 2021E cost of risk assumptions by an average of 50bps to 2.0% and 1.6% respectively, to reflect the spike in loan loss impairments.


Our 2020E EPS forecast is unchanged because of a positive surprise of N9.7bn in other comprehensive income (OCI). However, we have cut our 2021E EPS forecast by 2%. Despite the earnings downgrade, our new price target of N47.6 is 7% higher because we have rolled over our valuation to 2021E. Our new forecasts translate to a 2020E PBT of N248bn, just -2% below guidance of N253bn. At current levels, Zenith Bank shares are trading at a 50% discount to book value.


Although its P/B multiple compares with the 0.5x multiple that our universe of bank stocks is trading on, our 2021E ROAE forecast of 21.2% makes it more compelling vs. 15.6% for the sector.  Our new price target implies a potential upside of 190% from current levels. We retain our Outperform rating on the shares.              .


Q2 PAT up 61% y/y, thanks to OCI of N9.7bn

Zenith's Q2 PAT grew by 61% y/y to c.N63bn on the back of a strong result of N9.7bn in OCI (vs N595m Q2 2019). In contrast to the strong growth in PAT, PBT was up by low single digits (+2% y/y). Although pre-provision profits advanced by 9% y/y, the growth on this line was more than offset by a 72% y/y spike in credit loss impairments and a 5% y/y increase in opex.


In terms of contribution to pre-provision profits, funding income which was up by 35% y/y on the back of a 40bps y/y expansion in net interest margin was the growth driver. Non-interest income declined by -9% y/y.


Sequentially, PBT was down -6% q/q because of a 5.1x increase in credit loss impairments. Thanks to the positive result in OCI, PAT came in flat.


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