Sharing Zenith Bank’s growth testimony with shareholders

Zenith Bank recorded positive growth in both top and bottom line notwithstanding Central Bank of Nigeria’s (CBN) numerous tightening policies in 2014, which tapered industry’s earnings generation capacity.

Consequently, the bank posted an impressive growth of 14.8 percent Year-on-Year in gross earnings to N403.3 billion (8.6% above Afrinvest FY:2014 projection of N371.5bn) from N351.5 billion in FY:2013.

This impressive growth, according to analysts at Afrinvest, was achieved on the back of 39.1 percent and 15.9 percent Y-o-Y growth in non-interest income and interest income in FY:2014. The non-interest income was bolstered by two new line items – auction fee income (N3bn) and foreign withdrawal charges (N4.9bn) – which accounts for 10 percent of total fees and commission income. The bank will on March 26, 2015, share this positive growth testimony with its shareholders at the 24^th annual general meeting scheduled to hold in Lagos.

A further breakdown of the interest income revealed that the growth was premised on the 46 percent growth in income from loans and advances to customers (loans and advances grew 38.2% Y-o-Y from N1.2trn to N1.7trn) as income from fixed income securities declined 21.5 percent Y-o-Y in FY:2014 (investment securities dipped 344% Y-o-Y from N303bn to N200bn).

In the same vein, the bank’s PBT and PAT advanced 12.8 percent and 4.3 percent Y-o-Y, from N106.2 billion and N99.5 billion in FY:2013 to N119.8 billion and N99.5 billion in FY:2014, respectively. The moderation in FY:2014 PAT is attributable to the 51 percent increase in interest expense showcasing the bank’s aggressiveness for deposit mobilisation in 2014, amid stiff competition. This dwarfed the impressive growth in interest and non-interest income in FY:2014. Consequently, the bank’s Return On Average Equity (ROAE) and Return On Average Assets (ROAA) for FY:2014 tapered to 18.7 percent and 2.9 percent from 19.6 percent and 3.3 percent in FY:2013.

A report by Afrinvest shows that the bank remained aggressive in growing its loan books in 2014, recording a Y-o-Y growth of 38.2 percent to N1.7 trillion in FY:2014, relative to 26.4 percent recorded in FY:2013. The five-year senior unsecured $500 million Eurobond raised in the first half of 2014 provided the leeway for the bank to increase risk assets within the period under review. The bank’s loan-to-deposit ratio berthed at 68.2 percent in FY:2014 (vs. 55.0% in FY:2013), 11.8 percent below the CBN’s 80 percent threshold.

However, the significant growth in risk assets is in tandem with the CBN policy to drive lending in the Nigerian economy. The bank’s robust risk management process provided more positive impacts as the bank’s cost of risk moderated slightly to 0.8 percent in FY:2014 from 0.9 percent in FY:2013. Notwithstanding, the bank’s impairment charges rose 18 percent Y-o-Y to N13.1 billion from N11.1 billion in FY:2013. A further breakdown of Zenith Bank’s impairment charges show that overdraft accounts for 83.2 percent and increased 35.5 percent Y-o-Y in FY:2014.

“We attribute the growth in the overdraft’s impairment charges to the recent developments in the oil and gas space as most operators may have challenges in meeting up with their obligations relating to the available credit line. In this light, we expect the bank to review policies around overdraft loans to the oil and gas sector to tame the growing trend in subsequent years,” according to analysts.

However, the bank’s Capital Adequacy Ratio (CAR) continued on the downward trend Y-o-Y to settle at 20 percent (Basel II) in FY:2014 (vs. 26.0% in FY:2013 and 29.7% in FY:2012), traceable to its aggressive growth in risk assets relative to available capital. The bank’s CAR is 4 percent above the 16 percent CAR regulatory requirement for Systemically Important Banks (SIBs). As a result, analysts at Afrinvest expect Zenith Bank to raise additional capital via Rights Issue before the end of 2015 to increase its ability to increase risks assets, hence increase interest income.

The board of directors has proposed a dividend of N1.75 (vs. N1.70 in FY:2013), translating to a dividend yield of 9.2 percent (highest in the banking industry) at N19 share price.

HOPE MOSES-ASHIKE