September 2, 2021/Proshare

FBNQuest Research

3% reduction to our price target

Although Zenith Bank’s Q2 ’21 results were broadly in line with our forecasts, we have cut our FY ’21f EPS forecast by -6% to reflect the subdued interest rate environment. Following lower asset yields, interest income from T-bills and other securities fell by double-digits y/y, resulting in flattish funding income growth. With respect to balance sheet trends, Zenith’s loan growth was flat q/q, and tracks behind management’s FY ’21 guidance of 10%. Unless the interest rate environment and overall outlook improves, we do not expect the bank to aggressively expand its loan book in H2 ’21 to meet FY 21 guidance.

Furthermore, we believe that restructured loans which presently account for c.24% of gross loans, (about 74% of those in the oil and gas sector) still pose a risk to asset quality. As such, we have cut our FY ’21 loan growth forecast to 6% from 10% previously. We have also lowered our funding income forecast by 5%. Despite the results, management has kept its FY ’21 PBT and ROAE guidance unchanged at NGN270bn and 23.0%. For the PBT forecast to be achieved, the bank would have to generate c.NGN76bn on average over the next two quarters. This is, in our opinion, a bit of a stretch..

As such, our FY ’21 PBT and ROAE forecasts are more modest at c.NGN250 and c.19.5% respectively. Despite the extent of the downward revision to our FY ’21 EPS forecast, our new price target of NGN37.6 is only -3% lower because we have rolled forward our valuation to ’22f. At current levels, Zenith Bank shares are trading on a ’21f  P/B multiple of 0.7x for 18.7% ROAE in FY ’22. These compare with 0.6x multiple for 15.2% ROAE that our universe of banks is trading on. The shares imply a potential upside of 57% from current levels. Consequently, we retain our Outperforming rating.

Q2 PAT down 18% y/y

Zenith’s Q2 pre-provision profits were up 5% y/y, thanks to an 8% y/y growth in non-interest income. Despite the growth in pre-provision profits, PBT came in flat at NGN56bn as the increase in pre-provision profit was offset by a 14% y/y rise in opex. Returning to the revenue lines, the growth in non-interest income was driven by a 42% y/y increase in net fees and commissions over H1 ’21. Below the tax line, PAT after other comprehensive income (OCI) fell -18% y/y to NGN51.6bn on the back of a negative result of -NGN1.4bn in OCI compared with +NGN9.7bn in Q2 ’20. 

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3% reduction to our price target

Although Zenith Bank’s Q2 ’21 results were broadly in line with our forecasts, we have cut our FY ’21f EPS forecast by -6% to reflect the subdued interest rate environment. Following lower asset yields, interest income from T-bills and other securities fell by double-digits y/y, resulting in flattish funding income growth. With respect to balance sheet trends, Zenith’s loan growth was flat q/q, and tracks behind management’s FY ’21 guidance of 10%. Unless the interest rate environment and overall outlook improves, we do not expect the bank to aggressively expand its loan book in H2 ’21 to meet FY 21 guidance.

Furthermore, we believe that restructured loans which presently account for c.24% of gross loans, (about 74% of those in the oil and gas sector) still pose a risk to asset quality. As such, we have cut our FY ’21 loan growth forecast to 6% from 10% previously. We have also lowered our funding income forecast by 5%. Despite the results, management has kept its FY ’21 PBT and ROAE guidance unchanged at NGN270bn and 23.0%. For the PBT forecast to be achieved, the bank would have to generate c.NGN76bn on average over the next two quarters. This is, in our opinion, a bit of a stretch..

As such, our FY ’21 PBT and ROAE forecasts are more modest at c.NGN250 and c.19.5% respectively. Despite the extent of the downward revision to our FY ’21 EPS forecast, our new price target of NGN37.6 is only -3% lower because we have rolled forward our valuation to ’22f. At current levels, Zenith Bank shares are trading on a ’21f  P/B multiple of 0.7x for 18.7% ROAE in FY ’22. These compare with 0.6x multiple for 15.2% ROAE that our universe of banks is trading on. The shares imply a potential upside of 57% from current levels. Consequently, we retain our Outperforming rating.

Q2 PAT down 18% y/y

Zenith’s Q2 pre-provision profits were up 5% y/y, thanks to an 8% y/y growth in non-interest income. Despite the growth in pre-provision profits, PBT came in flat at NGN56bn as the increase in pre-provision profit was offset by a 14% y/y rise in opex. Returning to the revenue lines, the growth in non-interest income was driven by a 42% y/y increase in net fees and commissions over H1 ’21. Below the tax line, PAT after other comprehensive income (OCI) fell -18% y/y to NGN51.6bn on the back of a negative result of -NGN1.4bn in OCI compared with +NGN9.7bn in Q2 ’20.