Zenith Bank Q4 2019 Results Review: Compelling Valuation at Current Levels

Thursday, February 27, 2020 / 2:28 PM / By FBNQuest Research / Header Image Credit: Zenith Bank

Material revisions to our 2020E earnings forecast & price target

We maintain our Outperform rating on Zenith Bank and increase our price target by 17% to N47.7, implying a potential upside of 150% from current levels. The final dividend of N2.50 (register to be closed on 10 March 2020) implies a yield of 13.1%. 

Accordingly, we have increased our 2020E EPS forecast by c.16%. On its Q4 2019 conference call, management was optimistic that non-interest income will continue to grow strongly in 2020 on the back of solid growth in electronic products. As such, the upgrade to our 2020E earnings forecast is underpinned by a 19% upward revision to our 2020E non-interest income forecast.

Given the subdued interest rate environment, management sees a 20bp y/y reduction in NIMs to 8.0%. Despite the lower NIMs, we expect funding income to be flat y/y, largely because of the strong volume growth over the last two quarters. Following strong loan growth of 26% y/y in 2019, Zenith's LDR ratio (based on the CBN calculations) increased to 64.7%, almost in line with the regulatory minimum of 65%. As such, management sees modest loan growth of 2% y/y for 2020E.

On the back of our forecasts, we expect Zenith to deliver PBT growth of 4% y/y to N252bn, just shy of management's 2020E guidance of N253bn. Our ROAE forecast of 22% is slightly lower than the 24% guidance provided by management. Zenith shares are trading on a 2020E P/B multiple of 0.6x for 19% ROAE in 2021E. The multiple is at a discount of 47% to the 1.0x multiple that rival GT Bank is trading on, even though the discount is not fully reflected in their ROAE profiles (GT Bank 2020 ROAE 22.6%).              .

Q4 PAT up by triple digits, thanks to positive OCI of N11.9bn

Zenith's Q4 PAT grew markedly by 176% y/y to c.N70bn, thanks to a positive result of N11.9bn in other comprehensive income (OCI) and a lower effective tax rate of 13.4% compared with 59.4% in Q4 2018. Above the tax line, the y/y growth trend slowed markedly.

Q4 PBT grew by 4% y/y on the back of an 8% y/y growth in pre-provision profits which offset increases of 43% y/y and 10% y/y in loan loss provisions and opex respectively. In terms of revenue drivers, non-interest income which was up by 47% y/y was the key driver of the 8% y/y growth in pre-provision profit. In contrast, funding income declined by -22% y/y.

Sequentially, PBT grew by 4% q/q. Again, stellar growth of 60% q/q delivered on the non-interest income line was the primary growth driver.

In contrast, funding income fell by -27% q/q. PAT was up by 13% q/q because of the positive result on the OCI line. Relative to our estimates, PBT was in line. However, PAT beat by a sizable margin because of the positive surprise in OCI.

Visit Zenith Bank Plc IR Page in Proshare MARKETS

Related News

1. Zenith Bank Reaffirms Market Leadership As PAT Crosses N200bn Mark in FYE 2019
2. ZENITHBANK Declares N208bn PAT in 2019 Audited Results; Proposes N2.50k Final Div. (SP:N19.40K)
3. Zenith Bank Promotes Women Empowerment with Z-Woman
4. Zenith Bank Board Approves 2019 AFS And Payment of Final Dividend; Awaits Regulatory Approval
5. Zenith Bank Empowers Nigerian SMEs, Partners Facebook On SME Digital Workshop
6. Spectacle as Zenith Bank Lights up Ajose Adeogun Street, Victoria Island, Lagos
7. Zenith Bank 9 months 2019 Result; Strong Profit Outlook from Ebusiness, Modest Top Line Earnings
8. Zenith Bank Ignites Lagos with "Style by Zenith 2.0"
9. Fitch Affirms Zenith Bank Plc at 'B' plus; Outlook Stable
10. Zenith Bank and NFF Future Eagles Put Hungary to the Sword at the 2019 FIFA under -17 WC in Brazil