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Positive earnings growth in the near term

Following the release of its FY 18 results, we had engagement with management to seek clarity on grey areas in the result and guidance for the year ahead. Management guided to 7.5% loan growth over 2019 with a lot of focus on Agriculture and manufacturing given government incentives to drive growth in these sectors. Management stated that they see some opportunities in the differentiated cash reserve ratio introduced by the MPC over 2018. With its focus on driving retail penetration, they guided to deposit growth of 10% YoY with ~50% of it coming from the retail customers. CAR is expected to remain flat, slight improvement in NPL to 4.8% (with coverage of 180%), and cost of risk and cost of funds to worsen to 1% and 3.5% respectively (in line with prior year guidance). Overall, management estimate PBT and EPS growth of 4% and 6% YoY respectively.

We retain our STRONG BUY rating on Zenith with a revised FVE of N38.17/share (from N38.83/share). Over 2019, we forecast EPS of N6.57 which is 7% higher than 2018 (N6.16). Growth in earnings mainly reflects i) expansion in assets yield (+37bps YoY to 8.5%) from increase in loan book which would more than outweigh funding cost to support moderate expansion in NIM to 5.5% ii) increase in NIR following resilience in fee income and ii) improvement in asset quality with non-performing loan (NPL) ratio of 4.5% (-48bps YoY), slower expansion in cost of risk (CoR) to 1.0% with related loan loss provision of N19.2 billion (2018: N18 billion). Zenith trades at a FY 19E P/B of 0.9x, at a discount to GUARANTY of 1.3x, which is justified given the former’s strong and sustainable ROE. At current price, expected dividend of N2.92 over FY 19E translates to a dividend yield of 12.3%.

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