Considerable upside potential despite lower target price
Wednesday 02 June 2021 09:40 / by FBNQuest Research / Header Image Credit: Zenith Bank
9% reduction on our target price
We maintain our outperformance rating on Zenith Bank, but are downgrading by around -9% from our price target at NGN38.8, implying a potential upside of around 70% from prices. current levels. In contrast, we increased our EPS forecast for fiscal 21f by around 2% because the bank’s PAT exceeded our forecast by 10%. The profit growth is explained by a positive result of NGN 6.0 billion in other comprehensive income (OCI). Despite our improvement in earnings, our new price target is lower as we increased the risk-free rate on our DDM model from 150bp to 12.5% to reflect rising government bond yields.
Going forward, we expect Zenith to be a major beneficiary of rising market interest rates. The bank’s financial soundness indicators are also robust. Its solvency and liquidity ratios of 21.1% and 70% respectively are among the best in the industry. Its NPL ratio of 4.8% is also below the regulatory minimum of 5%. After suffering a multiple contraction of around 13% this year, we believe the bank’s current valuation multiple – a P / B multiple in 21f of 0.6x for a 19.4% ROAE in ’22f justifies a more positive view of the action. Zenith is also trading at a 38% discount to GT Bank, its closest counterpart.
We find this discount unjustified even if we consider their ROAE 21f – 19.8% ROAE against 22.8% for GT Bank. Zenith’s expected dividend yield potential of around 13.4% is also higher than the 10.3% yield we expect for GT Bank. We expect this valuation gap to narrow over the medium term. Coupled with the dividend yield, we are seeing a total return of approximately 83% from current levels.
T1 PAT down 6% y / y due to -50% y / y reduction in OIC
Zenith’s Q1 PBT increased 4% yoy to NGN61bn on 5% yoy growth in pre-provision earnings. To a lesser extent, a 2% reduction in loan loss provisions also contributed. Together, the two positives eclipsed a 6% year-on-year increase in opexes. Both income lines contributed to the revenue growth. However, non-interest income, which increased 10% year-on-year, was the higher of the two. A 104% year-over-year increase in revenue from net fees and commissions – primarily online banking and credit charges supported growth in non-interest income. Growth in financing revenues was modest at around 2% year-on-year.
Lower in the income statement, the PAT fell -6% year-on-year due to a 50% year-on-year decline in other comprehensive income to NGN 6.1 billion. Sequentially, PBT and PAT fell 22% to 29% q / q due to a 35% q / q reduction in non-interest income and a 16% y / y increase in opex.
- Zenith Bank’s unaudited first quarter 2021 results: significant improvement in liquidity position
- Zenith Bank shareholders approve naira 94.19 billion dividend
- Zenith Bank FY20 Results: Moderate Earnings Growth, Strong Increase in Assets
- Zenith Bank Q4 2020 Results Review: Favorable Risk Reward Compared to Peers
- Zenith Bank Gross Profit Rises 5% to N696.5 Billion
- Zenith Bank Becomes Nigeria’s Most Valuable Banking Brand
- Zenith Bank Approves 2020 Results and Final Dividend Payment, Awaits Regulatory Approval
- Ebenezer Onyeagwu named “CEO of the year” as Zenith Bank wins grand prize at the 2020 SERAS Awards
- Zenith Bank Q3 2020 results review: still on track to achieve 22.0% ROAE
- Zenith Bank becomes Nigeria’s best bank at Banker’s Bank of the Year Awards 2020