Zenith bank plc: impressive growth in profitability despite tough operating environment

Zenith Bank Plc offers its clients a wide range of corporate, investment, business and personal banking products and solutions. It is one of the biggest and most profitable banks in Nigeria. The bank was established in May 1990 and started operations in July same year as a commercial bank. It became a public limited company on June 17, 2004 and was listed on the Nigerian Stock Exchange on October 21, 2004 following a highly successful Initial Public Offering (IPO).

The Bank presently has a shareholder base of over one million, an indication of the strength of the Zenith brand. Zenith Bank listed $850.00 million worth of non-capital raising GDR on the London Stock Exchange on March 21, 2013. The Bank is headquartered in Lagos, Nigeria. With over five hundred (500) branches and business offices nationwide Zenith Bank has presence in all the state capitals, the Federal Capital Territory (FCT) and major towns and metropolitan centers in Nigeria. The Bank’s expansion is not limited to Nigeria as

Zenith became the first Nigerian bank in 25 years to be licensed by the Financial Services Authority (FSA) in the UK for the commencement of banking operations by Zenith Bank (UK) Limited in April, 2007. This is in addition to its presence in Ghana, Zenith Bank (Ghana) Limited, Sierra Leone, Zenith Bank (Sierra Leone) Limited, Gambia, Zenith Bank (Gambia) Limited and a representative office in Johannesburg, South Africa and Beijing, China.

Impressive growth in gross earnings amid tough operating enviroment

Gross earnings for the first three quarters through March 2015 grew by 20.14 percent to N113.22 billion from N94.32 billion in the corresponding year of 2014. Interest income increased by 13.98 percent to N81.72 billion in the period under review as against N71.43 billion recorded last year; driven by interest income from loans and advances which went up by 40 percent as a result of loan growth.

However, Interest income from T-bills, Bonds and Interbank placements dipped YoY as a result of further increase in CRR on private sector funds.

The banks interest expense jumped by 49.81 percent to N38.79 billion in the review period compared with N25.49 billion the previous year. A breakdown of the components of interest expense shows Interest expense on time deposits increased the most in absolute terms. Borrowed funds (eurobond & multilateral agencies) increased significantly to match the growth in the medium to long term USD funding needs of the bank.

Increased non interest income bouyed by growth in credit related fees and other income

The bank grew non-interest income by 40 percent to N31.90 billion in the first quarter of 2015 compared with N22.71 billion in 2014; driven by a 40 percent in credit related fees to N4.24 billion, 102 percent surge in trading income to N5.42 billion and 63 percent increase in other income. The strategy of the lender is commendable given the spike in noninterest income despite the phasing out of Commission on Turnover (COT) by the CBN.

Operating efficiency and loan growth boost bottom line

Zenith Bank Plc pretax profit jumped by 14.56 percent to N33.12 billion in the first quarter of 2015 as against N28.91 billion in 2014. Profit after tax rose by 16.91 percent to N27.68 billion from N23.671 billion in 2014. The stellar good performance at the bottom line was due to  the lender’s ability to keep costs at a reasonable level while increasing profit.

Cost-to-Income Ratio (CIR) declined YoY by 3.9% to 54.29 percent in Q1 2015 from 56.50 percent in Q1 2014. Growth in non Interest Income contributed to the decline in cost-to-income ratio. The CIR measures the ability of a bank in cutting cuts while increasing profits.

The bank’s cost reduction strategy is yielding fruit as operating expenses by a single digit 5 percent to N39.35 billion in Q1 2015 compared with N37.56 billion the previous year.

Single digit growth in loans and deposit as headwinds hiegten’s

For the first three month through March 2015, Zenith Bank grew loans and advances by 10 percent to N1.90 trillion from N1.72 trillion last year. Deposit from customers increased by 5.73 percent to N2.68 trillion in 2015 as against 2.53 trillion in 2014.

A breakdown of the banks by sector shows downstream oil and gas sector had 13.03 percent; followed by others, 10.98 percent; other manufacturing, 9.84 percent; upstream oil and gas, 8.40 percent; government, 6.96 percent;  general commerce, ,6.12 percent, and transportation, 5.85 percent.

The single digit growth in loan growth was influenced by the monetary policy of the CBN, the capital adequacy and industry competition.

To further exacerbate the already anemic position of banks is the economic crises bedeviling most companies in Africa largest economy. The International Monetary Fund (IMF) has estimated the country’s growth will slow to 4.8 percent from 6.1 percent in 2014, about half of the rate of the past 15 years.

The Abuja based Apex bank has also refused to remove the restrictions on foreign exchange trading a policy lender say is hurting profits.

Lenders are mandated to place 31 percent of their deposit with the regulator a policy some banks bemoan given its negative impact on deposits.

Zenith Bank continues to develop a solid Risk Management Strategy (RIM) and improve on the quality of its loan portfolio as overall Non Performing Loan (NPL) reduced to 1.70 in Q1 2014 from 2.80 percent the previous year. The ratio of 1.7% is currently one of the lowest in the industry.

Shareholders fund fell slightly by 4.74 percent to N526.43 billion in Q1 2015 from N552.63 billion last year. This led to a decline in the Bank’s return on average assets (ROAA). ROAA declined to 2.90 percent in the review period compared with 2.99 percent the previous year.

Return on average equity (ROAE) however jumped to 20.50 percent in Q1 2015 compared with 18.24 percent as at March 2014. This means the Bank is using shareholders resources in generating higher profit.

At 44.40 percent from 63.49 percent and 18.82 percent from 26.50 percent, the Bank’s liquidity ratio and capital adequacy ratio remains well above the minimum regulatory requirement of 30 percent and 15 percent respectively.

Chapel hill Denham places a buy on Zenith

Chapel Hill Denham, a an investment firm has placed a buy recommendation on Zenith Bank. This is because despite the headwinds fretting lenders such as the hike in CRR rate, devaluation of the naira and restrictions on foreign exchange trading, Zenith was able to deliver an impressive result.  While the policies are meant to control liquidity and protect the economy that is plagued by fall in oil price, analysts at Denham foresee a drop in loan growth as at FY-2015E.

The investment firm in its June 30 2015  banking report foresee  net interest margin (NIM) to average 7.2 percent over the next three years on rising assets yield and lower cost of funds.

“We expect this to be driven by assets re- pricing in line with macroeconomic developments and increased mobilization of cheap deposits,” said analysts at Chapel Hill Denham.

We believe Zenith is one of the banking stocks that will outperform the NSE ASI in 2015 on appealing earnings growth. The stock trading on FY-16E P/B of 0.9x and ROAE of 19.7 percent vs. our sector coverage average of FY-16E OF 0.7x and ROAE of 15.8 percent, said the report.

BALA AUGIE