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.

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  2. Zenith Bank shareholders approve naira 94.19 billion dividend
  3. Zenith Bank FY20 Results: Moderate Earnings Growth, Strong Increase in Assets
  4. Zenith Bank Q4 2020 Results Review: Favorable Risk Reward Compared to Peers
  5. Zenith Bank Gross Profit Rises 5% to N696.5 Billion
  6. Zenith Bank Becomes Nigeria’s Most Valuable Banking Brand
  7. Zenith Bank Approves 2020 Results and Final Dividend Payment, Awaits Regulatory Approval
  8. Ebenezer Onyeagwu named “CEO of the year” as Zenith Bank wins grand prize at the 2020 SERAS Awards
  9. Zenith Bank Q3 2020 results review: still on track to achieve 22.0% ROAE
  10. Zenith Bank becomes Nigeria’s best bank at Banker’s Bank of the Year Awards 2020

Proshare Nigeria Pvt.  Ltd.

Proshare Nigeria Pvt.  Ltd.

Proshare Nigeria Pvt.  Ltd.

Proshare Nigeria Pvt.  Ltd.

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