We keep our Outperform rating on Zenith Bank, but make a downward revision of c.-9% to our price target to NGN38.8, implying a potential upside of c.70% from current levels. In contrast, we have increased our FY ’21f EPS forecast by c.2% because the bank’s PAT beat our forecast by 10%.
The earnings beat was on the back of a positive result of NGN6.0bn in other comprehensive income (OCI). Despite our earnings upgrade, our new price target is lower because we have increased the risk-free rate driving our DDM model by 150bp to 12.5% to reflect the rise in government bond yields.
Going forward, we expect Zenith to be a key beneficiary of higher market interest rates. The bank’s financial soundness indicators are also robust. Its capital adequacy and liquidity ratios at 21.1% and 70% respectively are amongst the best in class within the sector.
Its NPL ratio of 4.8% is also below the regulatory minimum of 5%. Having suffered a multiple contractions of c.13% this year, we believe that the bank’s current valuation multiple – ’21f P/B multiple of 0.6x for 19.4% ROAE in ’22f justifies a more positive view on the stock. Zenith also trades at a 38% discount to GT Bank, its closest peer.
We find this discount unjustified even when we consider their ’21f ROAEs – 19.8% ROAE vs 22.8% for GT Bank. Zenith’s forecast dividend yield potential of c.13.4% is also higher than the 10.3% yield that we forecast for GT Bank. We expect this valuation gap to narrow in the medium term. Taken together with the dividend yield, we see a total return of c.83% from current levels.
Q1 PAT down 6% y/y due to a -50% y/y reduction in OCI
Zenith’s Q1 PBT was up 4% y/y to NGN61bn on the back of a 5% y/y growth in pre-provision profits. To a lesser extent, a 2% reduction in loan loss provisions also contributed. Together, both positives overshadowed a 6% y/y increase in opex. Both revenue lines contributed to revenue growth.
However, non-interest income, which was up 10% y/y, was the stronger of the two. A 104% y/y expansion in income from net fees and commission – mainly e-banking and credit-related fees underpinned the growth in non-interest income. Funding income growth was modest at c.2% y/y.
Further down the P&L, PAT fell by -6% y/y because of a 50% y/y decline in other comprehensive income to NGN6.1bn. Sequentially, PBT and PAT fell by between 22% and 29% q/q due to a 35% q/q reduction in non-interest income and a 16% y/y rise in opex.
