Non-interest income carrying the day
- Modest cuts to our 2018-19E EPS forecasts and price target: Zenith Bank’s Q4 2017 PBT was broadly in line with our forecast. As such, we have made modest revisions to our 2018-19 EPS forecasts and price target. On the earnings conference call, management was more confident than we had expected on the sustainability of income derived from derivatives (fx swaps) in 2018. This should go some way to offset the yield compression in fixed income instruments. Consequently, we have increased our non-interest income forecasts by around 9% on average over the 2018-19E period. However, we have cut our 2018E PBT forecast by -8% to N207bn (vs guid. of N210bn), mainly because we have increased our cost-of-risk forecast by 130bps to 3.1%, in line with management’s guidance. The cut to our PBT forecast notwithstanding, the modest change to our EPS forecasts is underpinned by a -400bp reduction in our tax rate assumption to 13% (from 17% previously). Although Zenith Bank shares have gained 16.6% ytd (vs. 12.0% for the ASI) our new price target of N37.5 (prev. N38.7) still provides a potential upside of 26% from current levels. On a relative basis, the shares are trading on a 2018E P/B multiple of 1.0x for 21% ROAE in 2019E, a 50% discount to rival GT Bank. We retain our Outperform rating on the shares.
- Q4 earnings grew by at least 23%; came in well ahead of expectations: Zenith Bank’s Q4 2017 PBT and PAT both grew by 27% y/y and 24% y/y to N51bn and N54bn respectively. The stellar growth in PBT was driven by a 99% y/y growth in pre-provision profit. Although provision for loan losses and opex spiked by 388% y/y and 95% y/y respectively, the growth in pre-prevision profits completely offset the negative trends on both lines. Moving up the P&L, although both revenue lines contributed to pre-provision profit growth, non-interest income which was up by a 251% y/y was the major driver. The remarkable performance of the non-interest income line was mainly due to a 934% y/y increase income from derivatives (fx swaps most likely) and a 242% y/y growth in trading income in 2017. Funding income grew by 12% y/y. Sequentially, PBT and PAT declined by 16% q/q and 4% q/q respectively. Compared with our forecast, PBT was slightly ahead (+4.7%). However, PAT beat by 51% because we had modelled a higher effective tax rate of 26.5% in Q4 2017 compared with the 4.3% tax rate reported by the bank.