Zenith Bank Q1 2019 Results Review: Shares Undervalued

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by FBNQuest Research / Header Image Credit: Zenith Bank

Modest revisions to our 2019-20E earnings forecasts2% avg

Although Zenith Bank’s (Zenith) Q1 2019 PBT came in well ahead of our estimates, PAT was broadly in line, due to a negative result of –N6.6bn in other comprehensive income. Consequently, we have made modest upward revisions to our 2019-20E EPS forecasts.

As such, our price target of N36.4 is unchanged. On the back of the revisions to our forecasts, we now expect the bank to deliver a 2019E PBT of N246bn or around 3% higher than the 2019E guidance of N240bn. We find the shares cheap on a relative valuation basis. Zenith Bank shares trade on a 2019 P/B multiple of 0.7x, a -50% discount to the 1.7x that rival GT Bank is trading on.

We find this multiple unjustified because it is not fully reflected in their returns profile (2020E ROAE of 21.9% vs. 28.8% for GT Bank). At current levels, our forecast 2019 dividend of N2.90 per share implies a yield of c.13.6%, much higher than that the 8.7% yield that we forecast for GT Bank. We see a potential upside of 71% from current levels. Consequently, we retain our Outperform recommendation on the shares.

Q1 PBT up 6% y/y, thanks to a 54% y/y decline in loan loss provisions

Zenith’s Q1 2019 PBT was up by 6% y/y to N57.3bn. The single-digit earnings growth was mainly driven by a -54% y/y reduction in loan loss provisions to N-N2.1bn. Further up the P&L, although funding income advanced by 23% y/y, a -35% y/y decline in non-interest income completely offset the y/y growth in funding income. As such, pre-provision profits came in flat y/y.

Despite the single- digit growth in PBT, PAT fell by -16% y/y because of a negative result of -N6.6bn in other comprehensive income (OCI) compared with a gain of N4.8bn in the prior year quarter.

Sequentially, PBT and PAT declined by between 10% q/q and 11% q/q mainly because of a 38% q/q spike in opex and the negative result on the OCI line. Relative to our estimates, PBT beat by 22% as a result of positive surprises in funding income, loan loss provisions and opex.

However, following the negative surprise in OCI, PAT growth decelerated to 6% y/y.

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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.