Retaining Outperform after strong Q2 results
· Maintaining Outperform rating following 37% increase to our PT: Zenith Bank’s (Zenith) Q2 2017 PBT surprised positively due to strong y/y growth in non-interest income which more than offset a subdued performance in funding income and negative surprises in loan loss provisions and opex. A significant y/y growth in fx trading income driven by marked-to-market gains on swaps was the key driver behind the solid growth in non-interest income. While the weakness in funding income was due to elevated funding costs linked to high yield on government securities, impairments were significantly higher during the quarter, due to exposure to telecoms (mainly 9mobile, formerly Etisalat) and aviation (identity of corporate not disclosed). Following the results, we have kept our funding income forecast broadly unchanged for 2017E but raised our cost of risk assumption by c.150bps to 3.2% (3%+ guid.). Nevertheless, we have raised our 2017E and 2018E EPS forecasts by an average of 17% to reflect the positive surprise in non-interest income and a stronger H2 outlook for the same. This, combined with our decision to roll over our valuation to end-2018 and an upward revision to the cycle ROE assumption in our DCF to 20% (from 17.5% previously), explains the 37% increase in our price target to N29.1. Although Zenith Bank shares are up 59% ytd (vs. 41% ASI), our new price target of N29.1 implies additional upside potential of 24%. As such, we retain our Outperform rating on the shares.
· Stellar PBT growth driven by y/y expansion in non-interest income: Zenith’s Q2 results showed that PBT grew by a remarkable 120% y/y to N48bn. The strong PBT growth was mainly driven by stellar growth of 389% y/y to N88.5bn on the non-interest income line. Growth on this line was underpinned by a strong performance in fx trading income which grew to N46bn from an fx loss in H1 2016. In contrast, funding income came in flat y/y. The strong revenue contribution was strong enough to completely offset increases of 196% y/y and 39% in loan loss provision and opex respectively. Further down the P&L, PAT declined by 19% y/y to N31.4bn mainly because of a negative result of –N6.3bn in other comprehensive income line (OCI) compared with a strong gain of N30.2bn in Q2 2016 on the same line. On a sequential basis, the results mirrored the y/y trends. PBT was up by 9% q/q. Again robust growth of N199% q/q on the non-interest income line was the key driver underpinning the q/q growth in PBT. PAT fell by -19% q/q because of the negative result on the OCI line.