Published On: Mon, Apr 16th, 2018

The Zenith spreadsheet…Peter Amangbo and Zenith Banks winning strategy


Zenith Bank has been just as enigmatic as its Chairman, Jim Ovia. Started in 1990 the bank evolved into the average eastern trader’s go-to bank. Transaction time was swift, rates steep but efficiency excellent. In the first half of the 1990’s and early 2000’s Zenith was as warm to the customer’s heart as babies were to their mother’s bosom. The banks 2017 audited financial statement stretches that affection a step further, but with a twist.

The bank’s customer deposits rose from N2.3 trillion in 2016 to N3.4 trillion in 2017, a growth of 51 per cent which was 500 basis points in front of the banks ten year compound annual growth rate of customer deposits of 46 per cent. In the area of loans and advances, just like other banks, Zenith has toned down its once booming credit base a few notches as loans fell from N2.3 trillion in 2016 to N2.1 trillion in 2017 or -9 per cent way behind its ten year compound average annual growth of 13.58 per cent.

But similar to the waves of loan impairments that have hurt profit and loss accounts of rivals, Zenith has also seen its books take a few bad body blows. The bank’s loan loss impairments went up from N32.5 billion in 2016 to N98.2 billion in 2017, a climb of 206 per cent.

Zenith…the profit engine works beautifully, or does it?

The bank’s net interest income has been growing steadily in the last five years moving up a few notches from N189 billion in 2013 to N258 billion in 2017, a cuddly growth of 36.3 per cent. But when the banks pre-tax profits adjusted for gross earnings are considered the banks margins seem to slide a couple of steps dropping from 30.22 per cent in 2013 to 27.30 per cent in 2017, the squeeze reflects both higher charges from impairments (bad loans) and a faster growing revenue base relative to profit growth as rising operating expenses put a firm fist over the incomes of the banks strategic business units (SBU’s).  Zenith saw net interest margin (a measure of underlying profitability in the bank’s core business segments) slide a number of notches as net margin slid from 15.12 per cent in 2013 to 10.49 per cent in 2016. Last year was (surprisingly) a good year for interest margin as the bank’s net interest spread climbed back up to 12.28 per cent, which was, nevertheless,  still 100 basis points behind the 2013 figure, but it shows that the banks management is coping with the broad business challenges imposed by a festering recession and a fragile recovery.

Going forward analyst believe that Zenith should see stronger interest margins as interest costs fall and incomes rise. According to Chioma Madueke of Emporium Assets and Investments, ‘ If politicians do not bungle the pre-election period through  avoidable crisis and poor policy, the economy should grow at about 2.35 per cent this year as against 1.92 per cent last year and this may nudge bank margins up a bit’ says Madueke.

If the bank grows its gross earnings at a compound average annual rate of growth of 20.7 per cent (as was the case between 2013 and 2017), then gross earnings for 2018 may land at about N899.2billion. Further if analysts apply a 35 per cent margin of net interest to gross earnings, net interest income in the New Year 2018, should turn up somewhere in the region of N313.31billion a few tidy metres ahead of 2017’s N257.99billion.  As far as profit goes says Madueke,’ Zeniths cash register is in very healthy condition’.

Are assets healthy?

Beyond the profitability of banks (which has been known to be an accountant’s clever bag of tricks), analysts have become increasingly interested in the quality of a bank’s assets which, hopefully, give some insight into how reliable the incomes from a bank’s loan portfolio actually are.  Analysts tend to glean this from the size of provisions banks make for their errant lending debts. On a compound annual basis between 2013 and 2017 Zenith Bank’s impairment charges have risen by 72.6 per cent from N11.0billion in 2013 to N98.2 billion in 2017. Evidently the bank has had increasing difficulties with risk assets (loans) and analysts note that there is a clear need for the bank to begin to reel in credit and water down the impact of toxic assets on the banks bottom line. According Segun Atere, former principal analysts at Apel Assets and Trust, ‘Zenith has done a marvelous job of growing its size but now it has to face the real hard work of keeping its loan book neat.  In a slow moving economy such as Nigeria’s that is as good as swimming across the Lagos lagoon with your arms tied behind your back’. 

That might be a bit of an exaggeration, but it does suggest that Zenith needs to take greater note of the quality of its credit. Loans and advances to customers currently make up almost 50 per cent of the bank’s total assets meaning that to guarantee the banks overall health some sector rebalancing may need to take place, with a reduction of the bank’s exposure to the oil and gas and energy sectors. Though rising international oil prices (at around $67 per barrel) indicate that some oil and gas companies in the upstream business should begin to experience operational recovery, this may be slow in coming. Nevertheless, a stronger oil sector should see improvements in Zeniths asset quality as companies begin to show greater commitment to repayment of overdue loans.  Says Atere, ‘the bank should feel some sense of relief, but a slowly reducing headache is still a headache nonetheless, the slow throbbing still irritates’.

Good for liquidity, good for the buck

Liquidity has been a massive challenge to banks over the last three years as the removal of federal revenues from commercial banks through the Treasury Single Account (TSA) policy tore their liquid assets to current liabilities position to shreds. If truth be told all the commercial banks in the country are yet to recover fully from the TSA onslaught on their books. Zenith, with its wide customer base and its special relation with large and medium sized manufacturers and traders from the Eastern parts of the country has weathered the storm better than most, at N3.4 trillion the banks deposit base is unquestionably sturdy.  

No problems with leverage

With customers deposit slightly over 72 per cent of total liabilities, leverage does not appear too much of a technically troublesome issue for the bank. A total asset to liability ratio of 1.17 is fairly decent although a number of analysts have expressed the opinion that a ratio of 1.5 would be a lot more reassuring,  Tinuola Bello analyst at Capstone Assets and Finance argues that, ‘we do not expect t see banks with large assets to liabilities ratios because a lot of the assets are current in nature and are tradeable, but we still need to see a threshold that assures that liabilities can be paid off in a sustainable manner, besides with the recent stickiness in bank loans, higher  asset to liability ratios  allow at least one investor eyelid to close at night’.

Granted that the Nigerian business environment has been a major rollercoaster over the last three years as recession decimated businesses and led to a loss of income by a growing army of unemployed, the banking sector has shown resilience and the Peter Amangbo–led management at Zenith bank has done a credible job of keeping the ship on an even course.

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