Following the improvement in FX liquidity for H1’2017, Analysts see Zenith bank’s growth in trade related fees to support non-interest income in Q2’17.
Given the uncertainty surrounding the resolution of Etisalat debt, and the fact that Zenith Bank has a sizable exposure (about N80 billion) in the consortium, we expect the bank to make some provision for the loan in its H1’17 results.
Strong top-line growth buoys earnings in Q1’17: ZENITHBANK recorded an impressive top-line growth of 48.6% in Q1’17, supported by strong advance in interest income (+40.3%) and non-interest income (+94.3%).
Growth in interest income was spurred by the performance of the company’s fixed income portfolio (+131% YoY) while non-interest revenue was supported by the growth in trading income (+1009% YoY).
Asset quality weakened further as impairment provisions rose by 206.0% YoY to N7.9 billion in Q1’17; this however moderated by 24.4% QoQ. Operating expenses increased by 24.2% to N48.2 billion largely driven by elevated energy and maintenance costs. Despite the rise in operating expenses, after tax earnings came in significantly stronger, up 41.1% YoY.
Total asset and net asset increased by 18.7% and 10.8% to N4.74 trillion and N687.9 billion respectively.
Strong top-line growth to drive profitability in H2’17: We project a 29.3% and 75.6% growth in interest income and non-interest income respectively in H1’17. We expect the strong performance of the bank’s fixed income portfolio to continue to support interest income given the high yield environment.
Therefore, we expect impairment provisions to rise by 62.0% YoY to N22.9 billion. Nonetheless, we still envisage c.60.4% YoY in bottom-line to N71.7 billion in H1’17. We expect the apathy for loan creation to persist in H2’17; hence we expect a meagre 7% growth in gross loans. Due to the concerns we have over the bank’s Etisalat loan and its exposure to the power sector, we envisage a 150bps rise in NPLs to 4.5% by FY’17.
We retain a BUY rating on the counter. We have raised our target price to N26.64 (previous: N20.29). Our target price still implies a 21.4% upside at current price of N21.95. The upward revision to our TP is influenced by our expectation of normalised impairments (or possible write-backs) and improvement in trade related transactions as a result of increased FX liquidity.
Hence, we retain our BUY rating on the counter. However, we believe the large exposure (N80 billion) of the bank to Etisalat poses significant risk to our valuation. Thus, the outcome of the ongoing mediation by the regulators is very vital to the actualization of our target price in the near term. The counter is trading at a P/B of 0.9x which is at a premium to peer average of 0.8x.