7-8% increase to our 2017-18E EPS forecasts / price target:
We retain our Outperform recommendation on Zenith Bank (Zenith), following its Q3 2017 results which came in well ahead of expectations. We have lowered the cost-of-risk assumption driving our loan impairment forecast for 2017E by c.20bps to 3.0% to reflect the positive surprise in loan loss provisions in Q3 2017.
This reduction underpins the 7% average increase to our earnings forecasts over the 2017-18E period and the 8% increase to our price target to N31.7. Our revenue forecasts have barely changed because weakness in funding income was offset by better-than-expected non-interest income. In contrast to Q2 2017 when fx trading income drove the solid growth in non-interest income, treasury bill trading income which was up markedly in Q3 was the primary driver behind the positive surprise in non-interest income.
Consequently, we have raised our non-interest income forecast by around 31% on average over the 2017-18E period but cut our funding income forecasts by 14% on average. At current levels, Zenith Bank shares are trading on a 2017E P/B multiple of 1.0x for 21.3% ROAE in 2018E. This multiple represents a discount of 53% to the 2.1x P/B multiple (for 28.0% ROAE) that GT Bank is trading on. Our new price target implies a potential upside of 25% from current levels.
PBT surprised positively; beat our forecast by 32%:
Zenith Bank’s Q3 2017 results showed low single digit y/y declines in both PBT and PAT. Although profit before provisions of N114bn showed a greater decline (-8% y/y), those on the provisions and opex lines proved significant, helping to limit the decline on the PBT line. Both revenue lines contributed to the decline in profit before provisions: while funding income was flattish, non-interest income fell -16% y/y because of base effects.
Also on a q/q basis, because of base effects again, the bank recorded a marked fall of -42% q/q for non-interest income. Notwithstanding, non-interest income actually surprised positively, coming in much stronger than we had expected. Given a lackluster performance in funding income however, the impact of the better-than-expected non-interest income result was not felt.
A significant positive surprise in loan loss provisions was the main reason for Zenith’s better-than-expected PBT (and PAT) result.