Thursday, November 18, 2021
/ 09:48 AM / by FBNQuest Research / Header Image Credit: Zenith Bank
4% average reduction to our FY '21-22 EPS forecasts
Zenith Bank's management guided to FY '21 PBT of NGN270bn, and an ROAE of 23%. Based on its 9M '21 results, we struggle to see how the earnings guidance will be met. The bank's 9M PBT of c.NGN180bn implies that it would have to deliver PBT of c.NGN90bn in the final quarter of FY '21 compared with an average quarterly run-rate of c.NGN60bn over 9M '21. The main driver of the weaker performance outturn relative to guidance has been a y/y deceleration in funding income growth, which is down to low single-digits y/y (4% y/y) over 9M '21 due to lower asset yields on investment securities, including T-bills and bank placements.
Relative to our forecast, PBT missed by c.-3% mainly because of a small negative surprise in funding income. Consequently, we have cut our FY '21-'22f EPS forecasts by 4% on average. Our new price target of NGN35.4 is also around -6% lower. Our earnings downgrade is underpinned by modest reductions (-2%) to our funding income forecast over the FY '21-22F period. On the back of these revisions, we now expect Zenith to deliver PBT of NGN245bn in FY '21, implying a -4% y/y decline in PBT and ROAE of 18.4% (vs 23% guidance).
On a relative basis, Zenith shares are trading on a '21f P/B multiple of 0.61x for 16.7% ROAE in FY '22. These compare with 0.57x multiple for 14.6% ROAE that our universe of banks is trading on. Despite our earnings revisions, our new price target of NGN35.4 implies a potential upside of 47% from current levels. Taken together with a potential dividend yield of 12.4%, we see a potential total return of c.58%. As such, we keep our Outperform rating on the shares.
Q3 PAT down 2% y/y
Zenith's Q3 PBT was flat y/y, at c.NGN63bn. Pre-provision profits were up 13% y/y, on the back of increases of 10% and 16% in funding and non-interest income respectively. However, the increases on the revenue lines were completely offset by a spike (7.6x y/y) in loan loss provisions and a 14% y/y rise in opex.
Further down the P&L, PAT was down 2% y/y to c.NGN55bn. Total comprehensive income fell -3% y/y to NGN53bn because of a negative result of -NGN1.5bn in other comprehensive income (OCI) compared with -NGN707m in Q3 '20.
Sequentially, PBT grew 2% q/q. However, following a higher effective tax rate of 13.2% vs 5.3% in Q2 '21, both PAT and total comprehensive income growth narrowed to c.3% q/q.