FBNQuest Zenith Bank Q1 2017 results review: Still offering double-digit upside potential

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.

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Ezeadichie Onyeka Michael is the Co-Founder of Haelsoft, a Professional Services Company in Nigeria that provides Information and Technology Services for small and big size companies in Nigeria(Africa). He is an Entrepreneur and Venture Capitalist with Expertise in Web Technology and Digital Marketing. He has developed & Implemented Digital Marketing Strategies(Campaigns) for top brands across sectors in Finance, Telecommunication, Ecommerce who operate in the African market. His professional experience includes key roles at Google Business Group(Nigeria), Google Women on the Web (Nigeria), Edubridge Consultant and Wild Fusion where he has trained over 500 Entrepreneurs on how to use various Web Technology products to succeed online. Customer centricity, User Experience, Conversion optimization are 3 pronged framework he applies around the often-frenetic world of web analytics to ensure that clients stay competitive in the market. He believes that investing in talent is the key to long term success for brands across Nigeria (Africa).

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