EUR 3.26 For Business Accounts Only

GTB vs. Zenith Bank: A fiction of Grit and Resilience 

• In this note, we update our earnings estimates and roll forward our target prices (FVE) for Guaranty Trust Bank (GTB) and Zenith Bank (Zenith).

• We think 2018 will be a turning point for the Tier 1 banks. ROE growth is likely to have topped in 2017, and we now factor in a slower growth over the next few years. In the face of lower interest rate environment, cautious loan growth, and capital preservation, we think benign funding cost, asset quality improvement, lower provisioning, and resilience in non-interest revenue (NIR) will be central to earnings over 2018. Also, in a low-growth revenue environment and faced with digital disruption, cost discipline and efficiency improvements will be key drivers of earnings growth and profitability, longer term, for the banks, in our view.
• We revise our stance on Zenith to ‘STRONG BUY’ from ‘OVERWEIGHT’ earlier, following share price decline and having revisited our investment case after FY 17 and Q1 18 results. We expect the Bank’s earnings to expand 2% YoY to N5.78/share for FY 18 due to: i) substantial compression in funding cost (-92bps YoY to 4.3%) as the decline in yields allows the bank to rollover term-deposit at lower rates; and ii) improving asset quality with NPL ratio expected to moderate 50bps YoY to 4.2%. Also, we expect Cost of Risk (CoR) to decline 118bps YoY to 3.5% implying loan loss provision of N74 billion (-25% YoY from N98 billion in FY 17). However, we estimate a 14% YoY decline in non-interest revenue (NIR), largely reflecting lower FX revaluations gains, and a 30% decline in trading income. Consequently, PBT should print at N208 billion (FY 17: N203 billion). We think loan book will fall materially short of management guidance (10% YoY), almost flat at 2% YoY, but see an expansion in investment securities (+7.5% YoY). Deposit book should expand 4% YoY. Based on our estimates, our fair value for Zenith, assuming a cost of capital of 21% and long-term growth rate of 5%, is 1.50x its forward book value. This would imply 30% upside potential to its current valuation of 1.17x.
• Elsewhere, we downgrade our rating on GTB from ‘OVERWEIGHT’ to ‘NEUTRAL’ on the back of a drop in our FVE to N49.02/share (previously: N55.20/share), following: i) downward revision to net loan growth in FY 17 to 3.3% YoY (previously: 7%); and ii) an upward revision to NPL ratio and CoR to 5% and 0.5% respectively (previously: 3.5% and 0.3%), albeit at healthy levels. Consequently, loan loss provision should print at N7.5 billion (-39% YoY). Irrespective, we revise our NIR higher to N72 billion, though lower by 20% YoY due to sizable decline in FX revaluation gains. However, our upward revision in NIR reflects steady growth in fee income (card related fees, account maintenance fee, and FX commission) as well as trading income on treasury bills trading and FX transactions relating to forward position which are pure trade transactions entered into between the customers of the Bank and CBN and awaiting settlement in CBN forward window. On the funding income and expense leg, we expect a 9% YoY increase in deposit and a 120bps YoY expansion in CASA deposit to 81%. NIMs should print at 9.2% (previously: 9.0%) with net interest income printing at N268 billion (+9% YoY). Consequently, we forecast gross earnings of N427 billion (+2.4% YoY) with cost to income ratio of 37.6% (+80bps YoY). Hence, we expect PBT of N204 billion (management guidance: N205 billion, FY 17: N200 billion). EPS should print at N6.12 (6% YoY). Based on our estimates, our fair value for GTB, assuming a cost of capital of 21% and long-term growth rate of 5%, is 2.7x its forward book value. This would imply 10% upside potential to its current valuation of 2.44x.
• While GTB remains a compelling investment case, we think growth is topping out and the valuation gap relative to Zenith will shrink a touch in 2018, and thus recommend a tactical approach to exposure. GTB trades at a current and 2018 P/B of 2.4x and 1.8x relative to Zenith of 1.2x and 0.9x respectively, implying a contraction in valuation gap to 86.5% (currently: 108.5%). Both banks are expected to report lower ROAE in FY 18 of 26.3% (GTB) and 20.6% (ZENITH) relative to 28.3% and 23.5% in FY 17.

See attached for full report.