ZENITHBANK: Upward Revision to 2017F Estimates; PAT and PBT to Grow y/y by 28.39% and 30.36%

October 31, 2017/Cordros Research

In its recently released Q3-17 results, ZENITHBANK reported 35.19% q/q and 8.89% y/y decline in gross earnings, following higher-than-expected contraction in interest income (-30.96% q/q and +4.54% y/y, 28.87% below our estimate) and a steep decline in non-interest revenue (42.07% q/q and 16.29% y/y, ahead of our estimate by 56.71%).

We have cut our gross earnings growth forecast to 35.21% (previously 39.97%) for 2017F to N686.40 billion, on expected lower growth in interest income. That said, following a downward revision of cost of funds and cost of risks, and the expectation of lower opex, we now forecast PBT and PAT growth of 28.39% and 30.36% (previously 9.61% and 8.28% respectively) to N201.85 and N169.01 billion respectively. As a result, our 2017F EPS of N5.38 is now 20.43% higher than the previous estimate.

While we maintain 12.98% (119 bps expansion from 11.79% in FY-16) estimated assets yield, we now expect loan growth to contract 7.09% y/y (previously estimated to grow by 9.41%) in 2017F, equating to 25.42% y/y (previously 36.38% y/y) growth in interest income. On the other hand, we have raised NIR growth to 65.73% (previously 51.16%), buoyed by strong trading income and revaluation gains.

On funding cost, we have revised our 2017F cost of funds lower by 55 bps to 4.85% (+70 bps y/y)  translating to 47.44% growth in interest expense to N212.88 billion. Our forecast y/y growth in interest expense reflects the impact of the elevated domestic interest rate environment and the high refinancing costs of maturing FCY obligations via the recently issued Eurobond (at a coupon rate of 7.375%, a 113 bps premium over the first tranche) and borrowings secured during the year. Overall, we look for 9 bps decline in net-interest margin to 7.46%, on faster increase in interest expense over interest income.

Over 9M-17, asset quality deterioration persisted, with NPL ratio rising 200 bps to 4.20% (albeit below the 4.30% in H1-17), while additional provisioning of N4.67 billion in Q3-17 further pushed cost of risk 140 bps higher to 2.70%, following specific provisions on bilateral exposure to Etisalat (now 9 Mobile) and collective allowance for impairment on exposures to the general commerce, transportation, oil & gas, and power sectors. While we acknowledge the restructuring (with oil & gas accounting for a larger proportion) and declassification of some power exposures, however, following the classification of some transportation and general commerce exposures as NPL, we maintain our 2017F NPL estimate of 4.50% and cost of risks of 2.02% (previously 2.68%) –  translating to a credit loss provision of N53.56 billion in 2017F.

We estimate opex to rise 25.60% y/y (previously 29.63%) to N219.20 billion in 2017F – translating to a 175 bps y/y contraction in CIR to 46.24% and increase in operational leverage to 4.4x (from 4.0x in FY-16).

While acknowledging the possible impact of the adoption of IFRS 9 from 2018F (with management guiding to a 20% impact on credit loss provision and 1% drop in CAR), we believe ZENITHBANK’s long position in fixed income securities (treasury bills +69.41% y/y and debt Securities +34.62% y/y) will continue to drive growth in interest income over 2018F. Hence, we revise our target price on the stock higher to N30.15 (Previous: N27.18), translating to 15.96% upside from yesterday’s close price of 26.00. HOLD.

ZENITHBANK is currently trading at 2017F P/BVPS of 1.0x (above peer average of 0.9x and below the 5-year average of 1.1x) and P/E of 4.9x (below peer average of 5.6x and below the 5-year average of 5.9x).

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