Zenith Bank Q2 2021 Results Review: Retaining Outperform Rating Despite Cut to Price Target


Thursday, September 02, 2021 / 03:42 PM / FBNQuest Research / Header Image Credit: Africa Inc.


3% reduction to our price target

Although Zenith Bank's Q2 '21 results were broadly in line with our forecasts, we have cut our FY '21f EPS forecast by -6% to reflect the subdued interest rate environment. Following lower asset yields, interest income from T-bills and other securities fell by double-digits y/y, resulting in flattish funding income growth. With respect to balance sheet trends, Zenith's loan growth was flat q/q, and tracks behind management's FY '21 guidance of 10%. Unless the interest rate environment and overall outlook improves, we do not expect the bank to aggressively expand its loan book in H2 '21 to meet FY 21 guidance.

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Furthermore, we believe that restructured loans which presently account for c.24% of gross loans, (about 74% of those in the oil and gas sector) still pose a risk to asset quality. As such, we have cut our FY '21 loan growth forecast to 6% from 10% previously. We have also lowered our funding income forecast by 5%. Despite the results, management has kept its FY '21 PBT and ROAE guidance unchanged at NGN270bn and 23.0%. For the PBT forecast to be achieved, the bank would have to generate c.NGN76bn on average over the next two quarters. This is, in our opinion, a bit of a stretch..


As such, our FY '21 PBT and ROAE forecasts are more modest at c.NGN250 and c.19.5% respectively. Despite the extent of the downward revision to our FY '21 EPS forecast, our new price target of NGN37.6 is only -3% lower because we have rolled forward our valuation to '22f. At current levels, Zenith Bank shares are trading on a '21f  P/B multiple of 0.7x for 18.7% ROAE in FY '22. These compare with 0.6x multiple for 15.2% ROAE that our universe of banks is trading on. The shares imply a potential upside of 57% from current levels. Consequently, we retain our Outperforming rating.


Q2 PAT down 18% y/y

Zenith's Q2 pre-provision profits were up 5% y/y, thanks to an 8% y/y growth in non-interest income. Despite the growth in pre-provision profits, PBT came in flat at NGN56bn as the increase in pre-provision profit was offset by a 14% y/y rise in opex. Returning to the revenue lines, the growth in non-interest income was driven by a 42% y/y increase in net fees and commissions over H1 '21. Below the tax line, PAT after other comprehensive income (OCI) fell -18% y/y to NGN51.6bn on the back of a negative result of -NGN1.4bn in OCI compared with +NGN9.7bn in Q2 '20. 


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