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Zenith Bank still thriving when others grope

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Since Zenith Bank Plc, Nigeria’s second largest bank, emerged on the banking landscape as a major player, it has not looked backed. To become one of the largest Banks by balance sheet after just two decades in existence is a remarkable accomplishment. 

With all the turbulence in the industry in the past few years, the bank has always emerged stronger and maintained its position in terms of profit performance.

There are a few things that make the performance of Zenith Bank unique and outstanding. It is the only bank in the industry that has continued to grow organically in spite of the induced mergers and acquisitions by the Consolidation programme in 2005. This means that the bank has continued to maintain a pure corporate culture since its founding.

Again, the decision of the management to go public long before the consolidation policy was visionary and put it ahead of competition in a very serious way. From that advantage the bank has kept a steady grip on the top leadership rung regardless of the prevailing economic conditions in the country. In the industry’s key performance indicators, whatever will upstage Zenith Bank’s financial scorecard may have killed off many other players.

The bank’s 2014 financial performance provides enough indication of its position in the industry. Having recognised the need for shareholders return, especially when probability of capital gain seems to have eluded investors at market level, the Board of Directors toasted shareholders to a dividend of N1.75 as against N1.70 it paid in 2013.

This translated to a dividend yield of 9.2% at N19.00-/+ share price. By comparison, Zenith dividend yield remains the highest in the banking industry.

The bank’s financial performance for 2014 showed noticeable improvements in some key performance indicators including post tax profit albeit marginal.These are recognize as an outcome of management team’s  blue ocean strategies conceived to ensure its results do  not fall below the line. In the banking sector, Zenith bank remains one of the banks where stakeholders’ expectations are high and usually met.

Innovation, balance sheet size & Profitability

Among the few top performers, what distinguishes them is not just the mega size balance sheets but the high degree of innovation. What distinguishes the bank is the quality of ideas that form the bedrock of operations. In the sector, there is benchmark, model that has consistently produce industry’s best return. Zenith bank recognized very early the critical role technology would play in the industry and exploited it.

Only the GTBank stands to look at Zenith at face when a bank is mention for any reason. The rivalry has become so intense that Zenith and GTBank in spite of different spectrum of operations, battle for supremacy side by side. One nudge triggers combination of reactions.

In 2014, the battle for supremacy among the banking giants was very much pronounced; it was a side by side engagement. By looking at the results, the duo are always at each other heels.

Peer analysis

Zenith Plc is not, at any moment, intimidated by GTBank’s retail banking success. More focus, quite stable and apparently firm in delivering two-fold results from customers and shareholders perspective.

If the Group has ever been intimidated, its management must have delved heavily into the retail segment. Zenith always stands for something – the bigger your pocket size, the best.

The Group’s major indicators are pointing into right direction. This tells investors and shareholders one thing, “real success”. In the banking sector performance check, there are real successes and some make-believe.But it seems ranking as second has become Zenith bank tradition in terms of profitability and assets growth. Well, you will notice impact of quality of earnings assets portfolio on bottom line of the bank. The Group raised gross earnings to N403.5 billion from N351.5 billion in 2013, representing 14.79% growth against the comparable period.

The bank turned the top line into a stronger pretax profit. The Group’s pretax profit rose by 12.81% to N119.8 billion from N106.2 billion last year. Going by the figures, it is observed that both top and bottom line grew at fairly stable levels. Though Zenith Bank Plc is at the heels of the GTBank Plc in term of cost management, but measured up comfortably in terms of profitability.

Key Performance Indicators

In spite of the situation that prevailed in the sector which had pressured operations and strategies, the bank improved its business efficiency as Cost to Income (CIR) remained stable in the period.

From its audited result, Cost to Income ratio remained relatively flat at 55.2% in 2014 against 55.7% in 2013.

Consequently, the bank’s return on average equity (ROAE) and return on average asset (ROAA) for 2014 tapered to 18.7% and 2.9% from 19.6% and 3.3% in 2013. In spite of this retraction, the bank still covered much ground compare to some of its peers. In 2014, Most results were affected beyond banks Chiefs quality of strategies on the back of harsh regulations.

Unfortunately, the bank’s Cost of Funds inched higher to 4.4% in 2014, from 3.4% in 2013, on the back of 44.9% increase in interest expense on time deposits in 2014. Similarly, net interest margin (NIM) narrowed marginally to 8.5% in 2014 from 8.7% in 2013 connected to the accumulated interest expense on deposits.

As well, the bank’s robust risk management process provided more positive impacts as its Cost of Risk moderated slightly to 0.8% in 2014 from 0.9% in 2013. The bank’s impairment charges rose by 18.0% to N13.1 billion from N11.1 billion in 2013.

Earnings

Zenith Bank Plc’s 2014 financial performance surpassed the analysts’ financial performance targets. The group audited result for the year 2014 confirmed that the bank recorded sterling performance notwithstanding the Central Bank of Nigeria’s numerous tightening policies which tapered the industry’s earnings generation capacity.

Further analysis of its numbers showed that the bank achieved an impressive growth of 14.8% year on year in gross earnings to N403.3 billion which is 8.6% above Afrinvest 2014 projection of N371.5 billion, from N351.5billion in 2013 while its profit after tax (PAT) went up by 4.3% year on year.

While this is the case, check on its figures indicate that N283.7 billion went down the drain to cover interest expenses as well as its operating cost out of N403.3 billion earnings. The expenses accounted for 70.3% of the Group’s gross earnings reflecting the ability to curtail cost.

Quality of Pretax profit

Zenith Group Plc’s profit before tax (PBT) and profit after tax (PAT) advanced by 12.8% and 4.3% year on year, from N106.2bn and N99.5bn in 2013 to N119.8bn and N99.5bn in 2014 respectively. Here, the group ranked first among Nigeria’s deposit money banks in 2014 although not on profit growth.

According to details in the Zenith bank audited result, the impressive growth was achieved on the back of 39.1% and 15.9% growth in non-interest income and interest income.

An indepth look into the result showed that the bank non-interest income was supported by two new line items previously not in the bank’s income statement line items.

The new financial statement line items are auction fee income of N3.0 billion and foreign withdrawal charges amounted to N4.9 billion which accounts for 10.0% of total fees and commission income for the year.

On the interest income, the growth achieved was premised on the 46.0% change in income from loans and advances to customers as income from fixed income securities declined by 21.5% between 2013 and 2014 as investment securities dipped massively by 344.0% from N303.0 billion to N200.0 billion. The bank loans and advances grew 38.2% from N1.2 trillion to N1.7 trillion in the year.

However, the moderation in 2014 PAT is attributable to the 51.0% increase in interest expense which showcased the bank’s aggressiveness in deposit mobilization amid stiff competition. It however dwarfed the impressive growth in interest and non-interest income.

The Group recorded impressive growth in risk assets compare with last accounting period in 2013. There was a very aggressive growth in its loan books; it recorded a growth of 38.2% to N1.7 trillion in 2014 relative to 26.4% recorded in 2013. However, this may portend future danger as some of these assets will likely go bad and require provisioning.

Again, its significant growth in risk assets is in tandem with the CBN policy to drive lending in the Nigerian economy. As well, the bank’s robust risk management process provided more positive impacts as its Cost of Risk moderated slightly to 0.8% in 2014 from 0.9% in 2013.

There was a connection in increase earnings assets in relation to borrowed fund. It may be recalled that Zenith Group accessed a five-year senior unsecured $500 million Eurobond in the first half of 2014. This provided the leeway for the bank to increase risk assets within the period under review. 

Its Loan to Deposit ratio berthed at 68.2% in 2014 as against 55.0% in 2013, which is 11.8% below the CBN’s 80.0% threshold. That means going forward, the bank has to attract more deposit from the market in order to create stable balance to further upswing loan book.

The Group may be having trouble controlling impairment generated through overdraft. A breakdown of Zenith’s impairment charges shows that overdraft accounts for 83.2%, an increase of 35.5% in 2014.

Afrinvest noted that the growth in the overdraft impairment charges was due to the recent developments in the oil & gas space as most operators may have challenges in meeting up with their obligations relating to the available credit line. The shock may return positive as oil market stabilises but the risk would not go away immediately.

“In this light, we expect the Bank to review policies around overdraft loans to the oil & gas sector to tame the growing trend in subsequent years”, Afrinvest remarked.

Capital Adequacy Ratio

Zenith’s Capital Adequacy Ratio (CAR) continued on the downward trend to settle at 20.0% (Basel II) in 2014 as against 26.0% 2013 and 29.7% in 2012, traceable to the bank’s aggressive growth in risk assets relative to available capital. The bank’s CAR is 4.0% above the 16.0% CAR regulatory requirement for Systemically Important Banks (SIBs).

At that threshold, the gap may not be sufficient enough for full launch of its operation in 2015. As a result, analysts expect Zenith to raise additional capital via Rights Issue before the end of 2015 to enhance its ability to increase risks assets, hence increase interest income.

With all the positive things going for the bank, it still carries an image burden of being one man show. Of all the banks in the industry, only Zenith still bears that burden, which seems to undermine its tremendous performance.  Most of the other banks have since transformed themselves to real corporate institutions. How the bank will continue with this image is anyone’s guess.  The history of the bank is right here.