Culled—Proshare

May 3, 2017/Vetiva Research

• Top and bottom line beat estimates, up 49% and 41% y/y respectively
• OPEX and Interest cost pressures persist
• Loan loss expense in line with estimates
• We revise our target price to N28.00 (Previous: N27.25)

Earnings beat, supported by strong top line growth

ZENITHBANK released its Q1’17 result posting impressive performances across major line items. In line with sector trend, Gross Earnings topped our estimate, up 49% y/y – 13% ahead of our estimate.

The strong top line performance was spurred by impressive growth in both Interest and Non- Interest Income, beating our estimates by 12% and 22% respectively.

Particularly, we note that both Interest and Non-Interest income were lifted by income from Treasury bills as the golden yield environment continues to support earnings across liquid Tier I names.

That said, we highlight the significant jump in Interest Expense, up 83% y/y to ₦47 billion vs. our ₦39 billion expectation.

However, supported by the 40% y/y rise in Interest Income, Net-Interest Income came in strong at ₦71 billion, up 21% y/y and ahead of our ₦66 billion estimate.

Whilst the significant rise in Loan Loss Expense to ₦7.9 billion (Q1’16: ₦2.6 billion) indicates weakening asset quality, the provision line came just in line with our estimate and better than the ₦10.5 billion recognized in Q4’16.

However, despite a 24% y/y rise in Operating Expense – 6% ahead of our estimate, PBT came in significantly stronger, up 38% y/y.

Overall, with relatively moderated effective tax rate of 15% (prior year’s 17% and our 19% estimate), PAT was up 41% y/y to ₦37.5 billion vs. Vetiva estimate of ₦30.3 billion.

We revise our target price to ₦28.00 (Previous: ₦27.25)

We have updated our model to reflect the positive earnings surprise. Whilst we maintain our 8% loan growth forecast (Ytd: 3%), we revise our yield on asset higher to reflect the strong yield on government securities.

Consequently, we revise our FY’17 Gross Earnings to ₦563 billion (Previous: ₦521 billion).

Also, we raise our cost of funds higher to reflect the persistent pressure (Q4’16 and Q1’17) on Interest Expense.

Furthermore, we maintain our loan loss expense forecast for FY’17 at ₦32 billion – translating to a Cost of Risk (CoR) of 1.3%.

Also, we revise our OPEX estimate upward to ₦191 billion (Previous: ₦182 billion). Overall, we estimate a flat y/y PAT of ₦131 billion (Previous: ₦121 billion).

Consequently, our target price is raised to ₦28.00 (Previous: ₦27.25). ZENITHBANK trades at FY’17 P/B and P/E of 0.6x and 3.8x respectively.