Nigeria’s Zenith Bank Records Positive Surprise in Q3 2017 Results as FBN Quest Lowers Cost of Risk

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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.

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Godwin Okafor is a Financial Journalist, Internet Social Entrepreneur and Founder of Naija247news Media Limited. He has over 16 years experience in financial journalism. His experience cuts across traditional and digital media. He started his journalism career at Business Day, Nigeria and founded Naija247news Media in 2010. Godwin holds a Bachelors degree in Industrial Relations and Personnel Management from the Lagos State University, Ojo, Lagos. He is an alumni of Lagos Business School and a Fellow of the University of Pennsylvania (Wharton Seminar for Business Journalists). Over the years, he has won a number of journalism awards. Godwin is the chairman of Emmerich Resources Limited, the publisher of Naija247news.

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