ZENITH BANK: Revenue, dividends trail confirm decade of superior service delivery

By JULIUS ALAGBE

From whichever angle you look at it, the current season is one that truly taxes even the strongest of men and institutions. With the COVID-19 pandemic continuing to take its toll all over the world, it is clear that virtually everything is currently being impacted.

Despite this, however, analysts reason that some organizations do have a greater chance of riding out the storm because of the solidity of their business systems, structures and performance through the years. One such bright jewel in the Nigerian financial landscape is Zenith Bank Plc and a peep into its revenue and dividends records across the decade confirms this.

Indeed, from the 1990s when it opened its doors to the banking public until date, the financial behemoth has left no one in any doubt that it is indeed here to stay.

Consistent with this description, the bank has consistently posted results that demonstrate its sterling strength and excellent performance and it has continued to garner very befitting laurels for it.

For example, Zenith Bank was voted as the Best Commercial Bank in Nigeria 2019 by World Finance. In the same year, it picked up the Best Digital Bank in Nigeria trophy from the rating agency, Agusto and Co. Additionally, Zenith Bank was also recognised as Bank of the Year and Best in Retail Banking at the 2019 BusinessDay Banks and Other Financial Institutions (BOFI) Awards. This is in addition to its emerging as the Most Valuable Banking Brand in Nigeria, for the third consecutive year, in the Banker Magazine “Top 500 Banking Brands 2020”, Best Bank in Nigeria 2020 in the Global Finance World’s Best Banks Awards 2020. It equally garnered the Bank of the Decade (People’s Choice) at the ThisDay Awards 2020.’

Underscoring the fact that Zenith’s track record of excellent performance is not just a historical statement, the bank has continued to demonstrate and post quite impressive outcomes even into the early phases of the current season of anomie that the entire world is now enmeshed in.

This much was corroborated by its performance as gleaned from its unaudited results for the first quarter ended 31st March 2020, where its profit before tax rose by 3%, up from 57.3billion to N58.7 billion.

Presented to the Nigerian Stock Exchange (NSE) on Wednesday 29th April 2020, among others, the report underscores the fact that the increased profits had benefited from the twin effects of continuing top-line growth and focused cost-of-funds optimisation.

For example, the Bank’s cost of funds declined significantly from 3.0% in March 2019 to 2.6% in the quarter, translating to a 10% decrease in interest expense, which dropped from N36.3 billion in March 2019 to N32.8 billion in the quarter. Despite this drop, the low yield environment concurrently necessitated the repricing of interest-bearing assets, which in turn resulted in a 13% compression in net interest margin, decreasing from 8.9% in March 2019 to 7.7% in the current period.

The Group also recorded a 6% increase in Gross Earnings from N158.1 billion in March 2019 to N166.8 billion for the period. This top-line growth was particularly driven by the 43% expansion in non-interest income from N32.7 billion in the prior-year period to N46.6 billion in March 2020.

Instructively, it also came out from the financial postings under consideration that Zenith Bank has continued to gain soaring customer acceptance with customer deposits increasing by 5% from N4.26 trillion in December 2019 to N4.46 trillion in the current period. The customer deposit mix rebalancing remains on-track as the Group added N150 billion to its savings account balances in Q1 2020, supported by its retail drive. The Bank’s total assets increased by 12% growing from N6.35 trillion in December 2019 to close at N7.13 trillion in the current period. In the quarter, gross loans grew by 11% from N2.46 trillion in December 2019 to N2.74 trillion within the period.

Impressed by the lender’s continued drive to keep all basic variables under control, CSL Stockbrokers in an April 14 report maintained that Zenith Bank’s numbers were still quite good and it was, therefore, placing a BUY grade on it. As the long-established and well-heeled institutional brokers put it:

‘Zenith Bank’s FY 2019 audited numbers showed a decline in the yield on loans to customers and money market instruments, however, impressive growth in Non-Interest Income supported profit growth.

FY 2019 Return on Average Equity (ROAE) of 23.8% compares with 24.3% for FY 2018. Though we expect Income will be impacted in the first half of the year due to the COVID-19 restrictions and have revised down our estimates accordingly, we expect this to be minimally offset by growth in some electronic banking lines.

Asset quality also remains strong with an NPL ratio of 4.3%, Cost of Risk (COR) 1.1% and a coverage ratio of 148% as at FY 2019. We do not expect a significant deterioration in asset quality in the near term.

Though we expect a strain in FCY loans following the reduction in oil prices and elevated risks to devaluation in the local currency, we expect that many of such loans will be restructured and their tenors elongated in the near term. We estimate a COR of 1.3% for FY 2020e.

Zenith’s FY 2019 Capital Adequacy Ratio (CAR) of 22% (without the full impact of IFRS 9) remains comfortably above the regulatory minimum of 15.0% currently. Zenith bank has c.39% of gross loans in foreign currency. We estimate that a 20% devaluation in the currency will result in a 45bps decline in the Nigerian bank’s 2020e CAR to 19.55% from 20.00% currently.

We find the valuation of the shares compelling (PBV: 0.47x, PE: 2.1x) and though we expect income growth to be challenged owing to the COVID-19 pandemic and the fragile economic conditions, we see no major disaster in view. The bank rates well relative to peers based on capital sufficiency, asset quality and sustainable long-term dividend yield.

We maintain a Buy recommendation on the stock and a revised price target of N30.85/s from N36.37/s previously. Downside risks to our forecasts are worsening macro conditions and an extended lockdown period beyond Q2.’

Resilient as this performance scorecard is at a time like this, pundits point to the fact that it is indeed standing on heritage and legacy of impressive growth that has been garnered over the years. BH checks reveal that it is indeed a track record that has been sustained across the past decade and going further.

For example, in 2010 when the Bank posted Gross Revenues of N192.48billion, it also recorded a profit before tax and dividend per share numbers of N50billion and N0.85 respectively.

In 2011, Gross Revenues came to 244.07billion while profit before tax and dividend per share advanced to N60.7billion and N0.95 respectively.

By the time, we get to 2015, Gross Revenues had surged to N432.56 billion with profit before tax and dividend per share numbers also mounting to new levels of N126billion and N1.8 respectively.

Not letting the ball go under any circumstance, Zenith Bank’s Gross Earnings rose by 6% once again to a new perch of N166.8 billion In Q1 2020, and up from N158.1 billion in March 2019. This is despite what is very clearly a combination of a very challenging domestic operating macroeconomic environment, unmitigated global headwinds and the ‘new normal’ of a Coronavirus pandemic.

The threat of COVID

Asked to hazard, how much of a threat COVID can have on a relatively well-heeled financial institution like Zenith Bank, the analyst, Eze Alloysius said:

‘It is going to affect it in the sense that COVID-19 has made the economy to slump and as a result of this, some of its debtors may not be able to meet their obligations to the institution, which could, therefore, have a not too salutary effect on the bank’s asset quality. Also, it could in this way, impact its NPL negatively.

This is in addition to what could be the challenge of raising fresh deposits at a time like this when people and businesses are battling a very choking liquidity squeeze.’

Efforts to get the bank’s spokesman, Dr Sunny Enebeli-Uzor to respond as to how very well the financial behemoth was braced for the challenge of COVID-19 were unsuccessful as at press time. But for a bank that has since its opening shop continued to demonstrate that it was indeed poised to rise to almost every demand that comes its way, it is apparent that a lot of strategic juggling is presently going on at Zenith Heights. And if the history of its revenue and dividends trail is anything to go by, it is apparent that going forward, even this cup would also pass for Zenith Bank.