February 26, 2021/Proshare

by FBNQuest Research

8% increase to price target

Zenith Bank’s (Zenith) Q4 ’20 results showed that revenues and PBT beat our forecasts soundly, mainly because of a positive surprise in non-interest income. Fx revaluations gains of NGN22.9 (vs -NGN1.9bn Q4 ’19) drove the variance in non-interest income, relative to our forecast. Following the results, we have made upward revisions of 32% to our ’21f non-interest income forecast.

Management did not provide specific guidance on non-interest income on its Q4 ’20 conference call. However, it was optimistic that volume growth on electronic banking and other fee-based products would drive revenue growth on this line. The upgrade to our forecast underpins the 12% upward revision to our ’21f EPS forecast. Notwithstanding, our new price target of NGN42.8 is only 8% higher because we have increased the risk-free rate driving our valuation model by 100bps to 11.0% to reflect the uptick in government bond yields. Given the prevailing yield environment and the outlook on interest rates, management sees a 10bp y/y expansion in NIMs to 8.0%. It was also confident in its outlook on asset quality, as it expects the bank’s NPL ratio to remain below 5%.

Due to strong loan growth of c.20% y/y in ’20, management has guided to ’21f loan growth of 10% y/y, in line with our forecast. Our new forecasts translate to a ’21f PBT forecast of NGN267bn, up 4% y/y, and just shy of the bank’s NGN270bn guidance. Although our ’21f earnings forecast is broadly in line with guidance, our ROAE forecast of 19.6% is 340bps lower than the 23% guidance provided by management.

To meet its ROAE target, the bank would have to deliver PBT of over NGN300bn, or make fair value adjustments (losses) to its book value. The shares are trading on a ’21f P/B multiple of 0.7x (for 19.2% ROAE in ’22f) or a 35% discount to book value. Our new price target implies a potential upside of 66% from current levels. We believe Zenith offers a favourable risk-reward relative to peers. We keep our Outperform rating.

Q4 PBT up 17% y/y, thanks to solid growth in funding income

Zenith’s Q4 PBT and PAT grew by 17-18% y/y due to a 42% y/y growth in funding income. A marked reduction in interest expense, as funding cost fell sharply, was behind the strong funding income growth.

As a result, pre-provision profit increased by 20% y/y. This pre-provision profit growth completely overshadowed a 150% y/y spike in credit loss impairments and a 9% y/y rise in opex.

Sequentially, PBT and PAT expanded by 24% q/q and 52% q/q respectively, as a result of a 37% q/q increase in non-interest income.