FBNQuest Zenith Bank Q1 2017 results review: Still offering double-digit upside potential
Still offering double-digit upside potential
· Raising our 2017E ROAE forecast to 18% after strong Q1: Following Zenith Bank’s better-than-expected Q1 2017 results, we expect market sentiment to improve towards the stock – despite still no official earnings guidance for 2017 from management. The results were quite strong, leading us to upgrade our 2017-18E earnings forecasts by an average of 22% and our price target by 6.3% to N21.3 (reflecting a 100bp increase to our risk free rate to 15.5%). Although both revenue lines were behind the positive surprise in Zenith’s earnings, non-interest income was particularly impressive with a 94% y/y growth. Although we have chosen not to carry forward the full extent of trading gains on tbills on this line, the strong performance in fee income (current account maintenance) led to a marked increase in our non-interest income forecast. We now expect Zenith to deliver a 2017E ROAE of 18.0% (15.1% previously). For this expected return, Zenith remains undervalued (2017E P/B multiple of 0.63x). We see upside potential of 38% from current levels.
· Earnings beat, despite negative surprise in provisions and opex: Zenith’s Q1 2017 results showed strong double-digit growth in PBT (38% y/y) to N44bn and PAT (46% y/y) to N39bn. While funding income grew by 21% y/y to N71bn, non-interest income was up 94% y/y to N30bn. Focusing on the latter, trading income recovered from a loss of –N1.9bn in Q1 2016 to a healthy positive result of N7bn. Fees and commissions were also up strongly by a similar magnitude in naira terms. These more than offset a sizeable increase in loan loss provisions (+206% y/y) and opex growth of 24% y/y. Compared with its Q4 2016 results, PBT grew by double-digits too, by 25% q/q and was helped by a -25% q/q reduction in loan loss provisions. PAT improved significantly (by 341% q/q) because the Q4 results had been weighed down by a marked negative result on the other comprehensive income line (-N21bn). The results were ahead of our expectations. Funding income beat our forecast by 22% and non-interest income 62%, leading to a positive surprise of 31% on the pre-provisions profit line. Although loan loss provisions and opex surprised negatively, the better-than-expected revenues more than compensated, leading to PBT beating our forecast by 49%. PAT was 57% higher than we had modelled because of a positive result on the other comprehensive income line (N1.5bn); we had forecasted zero.