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FBNQuest Raises Target Price of Zenith Bank on Improved Results

March 1, 2021

Analysts at FBNQuest have raised their target price for Zenith Bank Plc shares to N42.80 per share, following the improved results for the year ended December 31, 2020.
The price target implies a potential upside of 68 per cent from its closing of last Friday.

Zenith Bank Plc defied the challenging period and posted to grow its profit after tax (PAT) by 10.4 per cent to N230.565 billion from N208.843 billion in 2019 and declared a final dividend of N2.70 per share.

According to FBN Quest, following the results, they had made upward revisions of 8.0 per cent to the target price and 32 per cent to their 2021 full year(FY) non-interest income forecast.

The analysts explained that the upgrade to their forecast underpined the 12 per cent upward revision to our 2021 FY earnings per share (EPS) forecast. “Notwithstanding, our new price target of N42.80 is only 8.0 per cent higher because we have increased the risk-free rate driving our valuation model by 100bps to 11.0 per cent to reflect the uptick in government bond yields. Given the prevailing yield environment and the outlook on interest rates, management sees a 10bp expansion in NIMs to 8.0 per cent,” they said.
The analysts stated that Zenith Bank management was confident in its outlook on asset quality, as it expects the bank’s non-performing loans (NPL) ratio to remain below 5.0 per cent.

“Due to strong loan growth of 20 per cent in 2020, management has guided to 2021 FY loan growth of 10 per cent, in line with our forecast. Our new forecasts translate to a 2021 FY profit before tax (PBT) forecast of N267 billion, up 4.0 per cent, and just shy of the bank’s N270 billion guidance. Although our 2021 FY earnings forecast is broadly in line with guidance, our return on average earnings (ROAE) forecast of 19.6 per cent is 340bps lower than the 23 per cent guidance provided by management. To meet its ROAE target, the bank would have to deliver PBT of over N300 billion or make fair value adjustments (losses) to its book value,” they said.

FBNQuest noted that the shares are trading on a 2021 FY P/B multiple of 0.7x (for 19.2 per cent ROAE in 2022FY) or a 35 per cent discount to book value.

“Our new price target implies a potential upside of 68 per cent from current levels. We believe Zenith Bank offers a favourable risk-reward relative to peers. We keep our Outperform rating,” they analysts said.

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