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.
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