November 18, 2024/Cordros Report
In this report, we review our estimates and update our views on Zenith Bank Plc (ZENITHBANK) for 2024E, following the release of the bank’s 9M-24 earnings. ZENITHBANK delivered impressive top- and bottom-line growth in the period propelled by increases across the bank’s funded and non-funded income lines. Over the rest of the year, we upgrade our TP by 14.8% to NGN60.06/s and maintain our “BUY” rating. In this update, we have factored in the elevated yields and rising earning assets in deriving new core income estimates. Further down, the current weak macro space and inflationary pressures have spurred us to model higher impairment charges and operating expenses. The bank’s current derivatives position has also been accounted for in our non-core income estimate. We forecast a final DPS of NGN5.00 in 2024E, translating to a dividend yield of 11.5%. On our estimates, ZENITHBANK is trading on a 2024E P/E of 1.5x and P/B of 0.4x.
Robust Core Income to Boost Earnings: For 2024E, we model a 140.0% y/y growth in core income. This is driven by our expectation of an increase in asset yields as the bank is likely to reprice earning assets in response to the elevated yield environment, helping to counterbalance rising funding costs. We also expect non-core income to be boosted by fair value gains on financial instruments and higher net fees and commission income (+121.5% y/y). Meanwhile, we also expect the current risky environment to result in higher impairment charges (+31.8% y/y), leading to a 2024E Cost of Risk (COR) print of 6.4% (2023FY: 4.9%). Overall, we forecast a 84.1% y/y growth in 2024E gross income and model an average growth of 8.0% in 2025-2028E. We expect cost-to-income ratio to settle at 35.4% in 2024E (9M-24: 39.5%), reflecting elevated inflationary pressures. Accordingly, we forecast that ZENITHBANK’s profitability will increase by 86.0% y/y, indicating an EPS of NGN40.10 (+86.0% y/y) in 2024E.
Ample Liquidity and Capital Foster Growth Outlook: ZENITHBANK’s capital and liquidity positions remained well above regulatory levels with a CAR of 21.9% in 9M-24 (2023FY: 21.7%) and a liquidity ratio of 57.0% in the review period. The bank’s CAR and liquidity levels increased in 2023FY, given the retention of capital from significant FX revaluation gains. Thus, we expect the bank’s liquidity (70.0%) and capital (22.0%) levels to be boosted as the bank complies with the minimum capital requirement directive. We further anticipate accretion in profitability levels as the proceeds from the capital are deployed towards expansion into international markets. All told, the combination of the aforementioned shapes our positive outlook for Zenith Bank, as we believe the bank is well-positioned to capture growth opportunities.
Valuation: Our year end target price is NGN60.06/s, derived from a blend of the Dividend Discount Model (60.0%), Gordon Growth Model (30.0%), relative P/E (5.0%) and relative P/B (5.0%) valuation methodologies. Assuming a 32.4% CoE and a forecasted dividend pay-out ratio of 15.0%, our DDM FV amounted to NGN58.66/s. For GGM, we maintained CoE at 32.4% and utilised an average RoE of 17.0%, deriving an FV of NGN65.14/s. On Relative P/E, we utilised the tier-1 average P/E of 1.3x and applied it to our 2024E EPS estimate of NGN40.10/s to derive a FV of NGN53.13/s. Lastly, for Relative P/B, we utilised our 2024E book value per share of NGN145.13/s and a P/B of 0.4x and derived a fair value estimate of NGN53.33s.
