Despite political and economic instability, Zenith Bank’s returns industry projections, even as analysts remain bullish on its future projections. How does the Peter Amangbo led management achieve such an amazing feat year on year?
Action, the aphorism goes, speaks louder than words. However, it would appear as if numbers speak even better. Indeed, that appears to be the eloquent point, Peter Amangbo, the taciturn, self-effacing top gun of Zenith Bank Plc is making. When Amangbo was plucked from his relatively ”obscure” position as Executive Director of corporate and commercial banking in 2014, his name didn’t ring a bell.
Beyond the hallowed banking halls of Zenith and the guided world of banking industry, he was virtual unknown. But fast forward five years later and thrown in a few trillion naira, Amangbo has come in from the cold of anonymity, as the magic man, a veritable rain maker, minting year on year profits and giving Zenith stakeholders-investors, management, staff, something to smile about.
When Peter Amangbo took over as the Group Managing Director/Chief Executive Officer (GMD/CEO) of the Zenith Bank Group in mid-2014, the bank had a total assets value of N3.2 trillion and shareholders’ funds of N492.38 billion. However, 54-months thereafter, the bank`s total assets standing is now on the tip of N6 trillion, as it closed the year at N5.955 trillion. If the growth tempo is sustained, Zenith Bank Plc could indeed beat its N10 trillion projection in the next five years. This indeed is not a far-fetched proposition given that in the space of five years, the Peter Amangbo leadership has added N2.7 trillion to the Bank’s assets size. The numbers get even more interesting when it is seen that on the average, Zenith has grown its total assets at a rate of 13.2% annually or 1.16% each month till date.
With earning season here in full swing, and amidst market expectations for a bullish economy as already forecast, Zenith Bank is therefore one of the leading banks to watch out for in 2019. In its just released audited statement for 2018, though revenue slipped 15.4% against its 2017 result,the bank however compensated for this lag in terms of its profitability performance.
In other words, the bank earned less from its portfolio of interest earnings assets, as it grossed N440.1 billion, which is a 7.3% drop as against the N474.6 billion it grossed in 2017. Though the economy grew faster in 2018 when compared to the prior year, but Zenith bank’s results differ based on fundamentals.
In a similar situation, the bank expended far less on payments made to providers of funds on the bulk of its interest assets even as interest expense went down by 33.3%. It therefore implies that for every N100 earned from interest earning assets, Zenith spent about N33 in 2018 as against N46 in 2017. This means it operated with a lower cost of funds.
Overall, as the bank scorecard shows, Zenith Plc expended N46.4 on every N100 income it generated in 2018. This means that the bank’s operating cost expanded. Last year it only cost the bank N42.3 on the same amount of income. Compared with loans size, Zenith bank closed financial year 2018 with N2.497 trillion in total loans and advances.
This means that year on year, the bank cut back on lending by about 4% from N2.596 trillion. The bank however recorded an increase in non-performing loans in the same period when the industry average receded. Non-Performing Loans jerked up to 4.98% from 4.7% in 2017. For Zenith, it means that about 5% of its earnings assets have a doubtful recoverable value.
Its bearish stance on booking more loans seems to have paid off given the fact that banks in the same class did gun for cleaner books and better assets quality in 2018 as primary focus. The massive scale at which Zenith was able to reduce impairment charges on credits, from a whooping N98.2 billion to N18.4 billion in 2018 is exciting and impressive, some analysts commented.
As for operating expenses,at N225.5 billion, it stayed within the same region as in the previous year; up marginally but below rate of movement in general prices of goods and service, as average inflation closed the year at about 12%. Year on year, the bank’s profit before tax ramped up 16.2% to N231.7 billion from N199.3 billion. But a 49.4% uptick in tax expense rocked down profit to N193.4 billion after tax, leaving the bank’s earning per share at N6.2 in 2018.
Word on the street has been that the bank is developing bull-eyes for the retail segment. The question some observers are raising is that perhaps the corporate banking economy focus cannot satisfy the bank’s growth ambition, again. Perhaps, drive for lower funding costs is the driving factor. Either way, Zenith is diversifying its culture from predominantly dealing in high ticket deals to now inching for a place also at the retail end. The race has begun, anyway.
Crunching the numbers
From the analysis of its numbers and records, Zenith Bank Plc expended as much as N45.64 on every N100 earned from its interest-earning assets in 2017. Meanwhile, in 2016 it had corresponding costs as low as N37.55. If the trend is sustained, it means that it might have cost more but the audited result shows a reverse to the trend, as operating costs as proportion to operating income.
Though, performance remains relatively strong, it is still not really in line with analysts’ estimates. A review of its earnings trend shows that Zenith Bank Plc didn’t leverage enough of its about N6 trillion in total assets to generate revenue – up till the third quarter of 2018.
Review of its sales shows that as at the third quarter in 2018, the bank used N11.84 in assets to generate N1 in sales. In other words, Zenith made N1 on every N12 it had in total assets. This was not the case in 2017 when for every N7.50, the bank generated N1 sales.
At the end of third quarter 2018, the bank’s operating income closed the period at N349.72 billion while operating expenses was N182.416 billion. It means that the bank expended more than N52.2 per N100 income generated. The 52.7% cost to income ratio confirmed this. It then means that; Zenith was less efficient at using its investment in total assets to generate earnings in 2018. Compared with the equivalent period in 2017, operational costs seem to be in the same region. Stable cost for now, but cost outlook for the future could not really fall in line with precision but unlikely to balloon beyond normal. Zenith bank has its skin in the game.
Meanwhile, in the third quarter of 2018, cost of obtaining funds berthed at 3.3%, a reasonable point despite the fact that the bank recorded a decline in deposit in the same period. That could mean that an adjustment was made to funding mix or sources – possibly divested from highly priced term deposits. But that does not tally with increased interest expenses in 2017.
A step further into the deep shows that the bank had a rough ride in 2017 with funding costs which closed the year at 5.2%. Then, the bank’s gross earnings went down by 11% and interest income receded by 6% at the time when non-interest income retraced significantly by 20%. In the same period, a 5% decline in customers’ deposits triggered a 8% lowdown in the group’s gross loans and advances.
Market observers are saying that they are seeing a bank that is comfortable in its shell. This is the same view that some analysts are holding, as the bank’s stock under-performed in the market. The pattern of the bank’s income shows that about 91% of its income was derived from Nigeria in 2017, 7.2% in Africa market extension and 1.9% was from Europe. Also, it had more than 7,000 employees at the last count in 2017. Really, Zenith Bank Plc has all the necessary advantages to take the world by storm. But…
A few years ago, Zenith crested past FBNH as the biggest bank in terms of total assets. The position was to be short lived as Access Bank Plc was to rise up to lead its peers by size in the second half of 2018. Zenith is as at today yet the largest bank by capital base, but other banks are gradually catching up.
“When you look at total assets of the bank in relations to how much was generated in the past, you will observe that on the average, Zenith had a N7.50 assets pool to generate N1 in revenue in 2017. That was less than the amount of total assets per Naira income in 2016, at N9.33 to N1. However, its 2018 results indicates that for every N1 earning, the bank carried N9.44 in asset.
“At the point when a company gets to a certain level in its industry, tendency to become laid back often sets in. Zenith Bank Plc is pushing forth albeit slowly, and competitors are musing over the bank’s recent conservative business development”, analysts said.
The Chairman, Jim Ovia holds 9.4% of the bank’s shares, followed by 3.08% that is held by FIL investment advisors, a UK based company. Schroder Investment Management Ltd has 2%, Fidelity Management and Research Company 1.94% and Invesco Advisers Ltd 1.61%, amidothers with less than 1% shareholdings.
In 2017, Zenith Bank’s earning per share rose to N5.66 kobo out of which N2.77 was paid as dividend. This translated to a 49.32% payout ratio. However, in 2016, EPS closed the year at N4.12 out of which N2.02 was paid, therefore translating to a payout ratio of 49.03%. On its EPS of N6.2, the bank has offered to pay N2.50 in 2018.
How Zenith did it
At Broad Street expectations are high as earnings season is at hand. In the last few years, perhaps since 2015, some banks’ performance have been highly sensitive to average yield in the fixed income market. Banks that have enough liquidity and free cash flow have been able to boost performance with investment income.
In the tier 1 class, there may be no significant change in profitability performance, though you should be expecting to see contracted loan books with burgeoning investment in the fixed income market. This allusion is easy, as it may be recalled that the market was positive on high yield government securities.
In the period, most of the Tier 1 capital banks played heavily at the fixed income market in 2017, apparently an escape route from receded economic performance. The same trend underscored financial year 2018 when deposit money banks went after cleaner risk assets as industry non-performing loans berthed at 14.16% at the end of the third quarter of 2018. Some banks’ decision to improve assets quality triggered declined loans sizes. Cutback in loan books would ordinarily means loss of revenue, and this scenario played out at Zenith. However, investment income from fixed income market and placements moves saved the day.
In the midst of all these, Zenith Bank Plc stands strong, albeit not a strong enough performance to get from a Chief Executive Officer that is sitting atop a financial institution with total balance sheet size of about N5.6 trillion. Ahead of the release of the bank’s audited result, GTB will still be the bank’s major contender in terms of size of earnings.
S As a corporate bank, though Zenith is lowering it guard, a recent visit into the banking hall has confirmed the gap in earnings was due to deals sizes. Zenith has always pursued high ticket deals, which means a lower volume of highly valued transactions. Compared with GTB, retail size deals in large numbers of closures. Financial year 2018 may show a slightly different pattern. First, Zenith has started looking at the retail end, though the market is yet to understand how the bank will play strong here especially when it has to deal with the likes of GTB, UBA and Access Bank Plc.
Zenith’s non-performing loans closed financial year 2017 at 4.7%; having berthed at 4.2% at the end of the third quarter of the same year. But Zenith had to combat increased default rate in 2018, and closed the year at 4.98% as against the 5% benchmark set by the apex bank. What this means is that for every N100 loans book, just about 5% faces default risk. Simply, not the most comfortable place to be. But then, tomorrow will yet come.