Zenith Bank: Vetiva cuts price target, estimates as FX gain lifts Q1 earnings
Vetiva Capital Management Limited equity research analyst Joshua Odebisi has slashed the price target on Zenith Bank Plc to ₦30.45 from ₦33.73. The analyst hinged the decision to cut the price target on the economic headwinds awaiting in the coming quarters.
Vetiva stressed that the expectation necessitated a downward revision of the previous estimates. In the research note, he explained that the lender’s Q1:2020 profit was boosted by foreign exchange gain. It would be recalled that the Central Bank of Nigeria in a technical devaluation adjusted the official FX rate from ₦306 to ₦361.
That provides gain taken through the lender’s income statement up to the size of the dollar account at the point.
In the first quarter of 2020:
Zenith Bank reported an 8% year on year growth in gross earnings to ₦166.8 billion. This was marginally below Vetiva estimate of ₦169.8 billion. This came despite a 7% year on year decline in interest income to ₦114.3 billion as against ₦110.2 billion estimated by analysts at Vetiva.
Analysis of the lender’s financials revealed that the earnings improvement was driven by a 61% increase in non-interest income to ₦52.5 billion. So, the surge was attributed to a 339% significant spike in FX revaluation gains to ₦14.7 billion.
Analysts noted that this FX revaluation gain was observed across the industry in the aftermath of the Naira devaluation. Also, despite an 89% year on year rise in provisions to ₦3.9 billion and operating expenses growth of 20% to ₦71.2 billion, the bank was able to maintain the bottom line at ₦50.5 billion.
Though, the equity research analyst had expected profit to come stronger at ₦52.6 billion.
Non-Interest Income to support FY’20 profits
In Q1 2020, the poor yield environment coming from lower interest rate contributed to the decline in lender’s interest income. Despite the bank recording a 16% improvement in income from loans, these gains were offset by a 64% decline in income from T-Bills. Going forward, Vetiva said it expects further declines in interest income.
Especially, in the latter half of Q2 and early in the second half, due to the expected increase in loan defaults and persistently weak yield environment. On the other hand, the bank’s impressive non-interest income growth of 61% provides a potential upside for gross earnings. Analysts expect FX revaluation gains and trading income are expected to significantly boost the bank’s performance in FY’20.
Slower loan book expected in coming quarters
On the back of an aggressive drive to boost loans and advances to customers, Zenith Bank achieved 11% quarter on quarter growth in gross loans in Q1.
Notably, Vetiva stated that this was achieved thanks to a 13% quarter on quarter jump in term loans. According to analysts note, term loans account for 73% of the lender’s total loans. This led to a 6% improvement in loans to deposit ratio of 61.4% recorded. Though, Nigeria’s business stand-alone has an LDR of 71.4%.
The Bank’s non-performing loans ratio then pitched at 4.6%.
“Whilst this was an impressive start to the year, we expect the rate of loan growth to slow dramatically in Q2”, Vetiva stated. However, the analyst stated that this comes with the possibility of moderation in the loan book in the second half of 2020, due to economic challenges.
Vetiva expects lender’s NPL to worsen significantly, with impairment likely to almost double by year-end to ₦37.7 billion as against ₦18.8 billion in the previous year.
Target price revised to ₦30.45, as against ₦33.73
Vetiva research stated that despite Zenith’s solid performance in Q1 2020, the economic headwinds awaiting in the coming quarters have necessitated a revision to its previous estimates. First, Vetiva reduced gross earnings estimate to ₦677 billion, as against ₦694 billion previously projected.
However, it raises operating expenses forecast by 5% to ₦271 billion from ₦258 billion. “Thus, our forecast financial year 2020 profit after tax projection is lower to ₦203.4 billion, it had expected ₦222.1 billion, yielding a return on average equity of 20%.
“This gives expected earnings per share (EPS) of ₦6.48 and dividend per share (DPS) of ₦2.80.
“Therefore, we revised our 12-month target price to ₦30.45, as against ₦33.73 envisage previously”, Vetiva stated in the report. Meanwhile, analysts recognised that the stock has lost 15% year to date, and currently trading at a price to book of 0.4 times, as against Tier-1 peer average of 0.5 times.
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Zenith Bank: Vetiva cuts price target, estimates as FX gain lifts Q1 earnings
