Zenith Bank’s Impressive Performance

Contrary to the rising apprehension that economic headwinds would impact negatively on banks’ results, Zenith Bank reported improved profitability in 2016, reports Goddy Egene

The year 2016 was a very challenging one for companies operating in the Nigerian economy for various reasons. That was the year the economy went into recession. Companies contended with high inflation, energy and other infrastructural challenges, and most all naira devaluation and foreign exchange (FX) illiquidity.

The challenges manifested in the financial results of many companies for the nine months ended September 30, 2016. Many of them ended the nine months with declined bottom-line, while other recorded losses. The banks were not spared from the tough operating environment with some of booking huge losses on impairment charges.

The impairment charges, which mostly resulted from impact of the naira devaluation, made shareholders to be apprehensive as to how the banks would perform at the end of 2016. Just as those apprehensions were growing among investors in the banking sector, Zenith Bank Plc broke the ice last week. The bank calmed frayed nerves with a better-than-expected full year results, and declared a higher dividend. Financial results Zenith Bank Plc 2016 with an impressive performance despite the challenging operating environment. Specifically, Zenith Bank posted gross earnings of N384.56 billion, showing an increase of 10.4 per cent. Net interest income grew by 6.9 per cent from N224.58 billion in 2015 to N240.2 billion in 2016.

Net impairment charges jumped by 106 per cent from N15.67 billion to N32.35 billion. However, other operating income soared by 401 per cent from N5.302 billion to N26.598 billion. The bank maintained a low cost profile as personnel expenses rose marginally by 2.3 per cent to N69 billion, from N67.5 billion. Similarly, other operating expenses rose by 4.9 per cent from N89.9 billion to N94.4 billion.

Profit before tax rose by 24.7 per cent to N156.75 billion from N125.62 billion, while profit after tax stood at N129.65 billion, from N22.7 billion, showing an increase for 22.7 per cent.

Zenith Bank’s loans and advances improved by 15.1 per cent to N2.289 trillion, from N1.989 trillion, while customers’ deposits recorded a fast growth of 16.6 per cent to hit N2.983 trillion, from N2.557 trillion. In all, Zenith Bank ended the year with total assets of N4.739 trillion, up by 18.2 per cent from N4.01 trillion in 2015.

Based on the impressive performance, the directors recommended a final dividend of N1.77 for shareholders, bringing the total dividend for the year to N2.02 per share.

Commenting on the results, analysts at FBN Quest, said compared with their estimates, although PBT was impressive, beating their forecast by 44 per cent, PAT missed by 47 per cent because of the OCI loss.

They said: “We had forecasted zero on this line. Returning to the PBT line, the main drivers behind the better-than-expected result were positive surprises in non-interest income and opex which beat our forecasts by 45 per cent and 34 per cent respectively. Given that profit before provisions came in nine per cent weaker than we were expecting, we would not want to make too much of the results (net interest income was weaker than our forecast by 25 per cent; this may have been due to the revenue recognition). We suspect that opex was also lower than expected due to accruals having over-run in the nine months period.”

Analysts’ assessment

Analysing the results, analysts at Meristem Securities Research said bank’s gross earnings advanced by 17.5 per centN508.00 billion, on the back of the 10.5 per cent growth of interest Income to N384.56 billion and a 46.3 per cent increase in non-interest income (NII) to N123.44 billion. According to them, interest income growth was aided by the increase in loans and advances to customers, which grew to N2.29 trillion. “The growth in loans was primarily due to the translation of foreign currency loans, given the marked depreciation of the naira in the year. Also, interest income generated from investment securities, advanced by 25.5 per cent to N108.92 billion as a result of the high-interest yield environment witnessed in the year,” they said.

The analysts explained that NII grew markedly, supported by revaluation gains of N25.58 billion (+809.3 per cent gains from N2.8 billion in 2015) and foreign exchange trading income of N20.01 billion (+1,123.3 per cent from NGN20.01 billion in 2015).

“Also, fees and commission generated by the bank were relatively higher, pegging at N68.44 billion (+12.4 per cent from N60.90 billion in 2015),” they said.

Superior efficiency smothers higher costs

Meristem Securities said Zenith Bank was quite remarkable with respect to operational efficiency, as cost-to-income ratio (CIR) declined notably to 52.7 per cent (vs 57.2 per cent in 2015), driven by the substantial growth in operating income, which advanced (+12.9 per cent to N331.27 billion vs. N293.27 billion in 2015) at a faster pace than operating expenses (+4.0 per cent to N174.52 billion vs. N176.26 billion in 2015). Interest expenses grew by 16.8 per cent to N144.38 billion (vs N123.60 billion in 2015), as the cost of funds increased by 0.2 per cent to 4.2 per cent in the period. The most notable increase was the interest expense on borrowed funds which grew by 89.6 per cent to N33.37 billion (vs. N17.59 billion 2015).

“We note that the bank’s borrowings and debt expanded by 18.9 per cent to 76.72 billion, mainly due to the depreciation of the naira, as a good proportion of borrowings are foreign denominated,” the analysts said.

Also, loan loss expenses advanced by 106.4 per cent to N32.35 billion ( N15.67 billion in 2015) against a backdrop of increased provisions on foreign currency loans necessitated by the depreciation of the naira. Consequently, the bank’s Cost of Risk (CoR) advanced to 1.4 per cent (vs 0.8 per cent in 2015).

Despite the high inflation witnessed during the year, operating expenses increased only marginally by 3.9 to N174.52 billion ( N167.88 billion in 2015), mainly due to increases in fuel and maintenance costs, technology, regulatory and personnel expenses.

“Overall, the level of income generation was enough to ensure the bank’s PBT (PBT) advanced 24.8 per cent to N156.75 billion (vs N125.6 billion in 2015), trickling down to an increased PAT of 22.7 per cent to N129.65 billion (vs. N105.66 billion in 2015), even as effective tax rate increased (17.3 per cent vs. 15.9 per cent in 2015). Consequently, profitability ratios, measured by Return on Average Equity (ROAE) and Return on Average Assets (ROAA), advanced to 20 per cent and 3.0 per cent respectively (vs. 18.4 per cent and 2.7 per cent in 2015). Reassuring balance sheet position Meristem Securities said that given that their forecasts of the bank’s performance were in line with the numbers released (i.e. Gross and Net earnings were forecast at N511.19 billion and N131.45 billion accordingly vs. actual numbers of N508.00 billion and N129.65 billion respectively), they have maintained their forecasts in principle, adding that they have made some minor adjustments to reflect current economic realities (such as improved FX liquidity), which could potentially affect future performances.

“We note that our loan loss expenses forecast reduced markedly, given the high level of provisions already taken by the bank, as well as our outlook of a much lesser depreciation of the naira relative to 2016, even as we do not expect significant changes in economic fundamentals,” they added.

According to them, they considered the impact of the bank’s current balance sheet position with respect to prudential requirements and note that the current CAR of 23 per cent is well above required threshold of 15 per cent.

“Also, the NPL of 3.0 per cent, though deteriorated relative to 2015 (2.2 per cent), is well below the statutory limit of 5.0 per cent. The bank currently has an NPL coverage ratio of 100 per cent, which further highlights the level of safety. Also, the liquidity of 55.2 per cent, is well above the statutory limit of 30 per cent. All the prudential ratios suggest the bank’s solid balance sheet position, together with its level of income generation helped sustain its dividend paying culture. Gross dividend declared in 2016 at N2.02 per share represents a payout ratio of 49 per cent (vs five-year historical at 52 per cent),” they said.

The analysts said discounted dividend model (DDM), and price multiples valuations puts Zenith Bank at a target price of N19.31, stressing that they therefore retain their “Buy” recommendation on the stock.