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2023 : Zenith Bank’s Exponential Q3 Profit    Growth

It wrenched up  Profit before tax and Profit after tax  by  149% apiece to  N505.04b  and N434.17b in 2023 from  N202.55b  and  N174.33b respectively in 2022

The third quarter result for 2023 recently released by Zenith Bank is another harbinger of a juicier outing  for the full financial year ; just like the first and second quarter results earlier released ,all its performance metrics are practically looking up, indicating the bank is set to capture and retain its two usual laurels : the biggest bank by profitability and the most valuable bank .

Powering its earnings way above a trillion Naira ,spiking its balance and sheet size , it  is interesting to note that the lender’s third quarter earnings have significantly exceeded Full Year (FY) 2022 numbers . This validates its consistent solid growth at the top lines (revenue) and bottom lines (profit) while curtailing operating costs in the face of a challenging environment.

 Zenith Bank’s gross earnings spiked by 112.70 percent to N1.23 trillion in the first nine months of 2023, which is higher than N945.55 billion recorded as at December 2022. It had N620 .57b in the third quarter period of 2022 as its gross earnings.

 DELIVERING EXPONENTIAL PROFIT  GROWTH

The Group recorded impressive profit in 9M 2023 despite a steeply inflationary environment as the triple-digit growth in the top-line enhanced its bottom line . it wrenched up  Profit before tax and Profit after tax  by  149% apiece to  N505.04b  and N434.17b  from  N202.55b  and  N174.33b respectively.The lender was particularly helped by a tidy bundle from FX revaluation gains

This is not limited to Zenith Bank .As naira depreciation unlocked a major income line item for many banks in 2023, it cushioned the effect of rising operating costs and fee-based income.This large holdings of foreign assets which kept them on the positive side of the naira depreciation is expected to persist till Q4 2023, suggesting a strong performance in FY 2023 compared to previous years.

However ,excluding revaluation gains, the bank still made a strong earning of N671b from interest income coupled with a N79bn earnings from fees and commissions.

 But Zenith is not only delivering profit  exponentially   in absolute sense but delivering a better value for money for its investors with its capability for cost optimization

 A strong growth in both interest and non-interest income reflected in the Bank’s operating income with a remarkable 2.1 times yoy increase to N1.02 trillion as at September 2023, outpacing operating expense growth of 20.4 percent year on year (yoy).

As a result of the significant improvement in efficiency, the bank’s cost-to-income ratio settled at 30.1 per cent in 2023 from 63.4 per cent in 2022.The improvement came from the strong growth in operating income over operating expenses, cushioning the cost-to-income ratio from in the past four years . This shows better cost optimization and efficiency.

Data from MoneyCentral Intelligence that Zenith has the second smallest CIR among the tier 1 banks; GTCO (25.9 percent), UBA (36.4 percent), FBNH (50.0 percent) and Access (59.3 percent).  

To cement its place as the most profitable bank, return on Average equity (ROAE), improved to 35.1% from 18.0% an increase of 95% while return on Average assets (ROAA), improved to 3.8% from 2.2% , an increase of 73%

Another  confirmation of this is displayed by its operating margin  at 77%%  Though this a little less than its quarter 2022 performance at 79.8%  , however  ,its operating margin an industry best .

 Consequently , the bank’s pre-tax margin  rose to 38 percent from 33percent .The net income margin too followed similar positive trend  at 32.6percent from 28%  , meaning the bank is able to effectively control its costs and/or services at a price significantly higher than its costs in the third quarter of this year than the corresponding period of last year . This ratio represents better efficient management, lower   expenses  and stronger  pricing strategies This profit margin represents gains in real terms in an economy with rates of inflation less than 20 percent.

So not only did the business gained for itself with a positive spread on yield and cost of funds, it had gained for shareholders by beating inflation in its profit margin.

 .THE MOST VALUABLE BANK

The banking industry was a strong beneficiary of the equity market rally witnessed in 9M 2023, with the banking index generating a year-to-date return of +60% as of September 30, 2023. The huge revaluation gains realized from the exchange rate consolidation further strengthened investors’ attraction to banking stocks in Q3 2023. Thus, Zenith ’s share price broke free from the bearish corridor witnessed in 2022 to a bullish orbit. For those impressive signals and the outstanding fundamentals behind them , this lender has remained  one of the best stocks on the NGXASI index and the cream of the crop.

 ZENITHBANK closed its last trading day (Friday, November 10, 2023) at N33.05 per share on the Nigerian Stock Exchange (NGX). At this price per share , it remains the most valuable bank with a market capitalization of  ₦1.0t , leading the pack and followed by Guaranty Trust Holding ,GTCO, FBN Holdings, United Bank for Africa and Access Holdings with their market capitalization at ₦760.6b,₦717.9b, ₦709.6b and ₦595.8b respectively

Summary of all time highs, changes and price drops for Zenith Bank indicated its  52 Week High ₦37.80 while 52 Week Low ₦19.90 .It  began the year with a share price of 24.00 NGN and has since gained 37.7% on that price valuation, ranking it 66th on the NGX in terms of year-to-date performance.  

 With its Price-To-Earnings ratio (2.1x) which  is below the  market 7.6x  , earnings  growth  at  13.7% per year over the past 5 years and Earnings per share (EPS) 15.41

 analysts are in good agreement that stock price will rise by 23.7%

Their view may not be farfetched .With its price earning ratio at  2.1x and price to book at  0.5x  P/B Ratio, Zenith Bank stock is believed to be cheap and loaded with competitive potentials to deliver both capital gain and dividend

 Zenith Bank is the 10th most traded stock on the Nigerian Stock Exchange over the past three months (Aug 14 – Nov 10, 2023). ZENITHBANK has traded a total volume of 928 million shares—in 22,930 deals—valued at NGN 31.2 billion over the period, with an average of 14.7 million traded shares per session. A volume high of 75.4 million was achieved on September 4th, and a low of 4.34 million on October 19th, for the same period

BUILDING ITS COMPETITIVE RESOURCE BASE

 As its tradition , the  starting point of its current successful strategies is the acquisition ,retention and development of competitive resources . Zenith Bank ,without any argument, has continued to build a competitive and robust balanced sheet with total assets and equity base that is highly strong and diversified .

Its total assets grew by 48percent from N12.3trillion in 2022 to N18.2trillion in the third quarter of 2023 ., mainly driven by the growth in customers deposits .Out of this, its shareholder fund stood at N1.92trillion rising by 39percent from N1.38trillion .A puffy assets level could indicate improved strengths in mopping up transactions, including a better position in maturity transformation- the stuff banks are best suited for. It can also mean that the bank has applied some elastic to its wings in the form of more customer touch points, branches and Point of Sale devices. For zenith, it was all of these and more.

Growing its assets aggressively may not be farfetched. The size of a bank’s assets serves as a crucial indicator of its capacity to support economic activities. In Nigeria’s dynamic financial landscape where industry asset size reached N73.59 trillion in 2022, a bank’s ability to create loan assets through capital-intensive sectors like oil and gas, manufacturing, and infrastructure development proves crucial. A larger asset base allows banks to offer a wider range of financial products and services, fuelling economic growth and stability. As banks continue to grow their assets, they contribute significantly to the overall strength of the nation’s financial system.

Moreover , with the advent of technology and digitisation, digital income has become a critical metric for banks to assess their competitiveness and adaptability. The Industry’s consistent growth in earnings over the years, supported by digital income, showcases the banks’ competitiveness and ability to explore alternative revenue streams in the digitised era.This also requires huge resources .

CORE BANKING , CORE PROBLEMS

 However, while its strong financial resources are critical and inevitable for its success and survival , its capability to deploy them and generate core competences is where the difference between it and its competitors become more glaringly evident ;to outperform competitors in a fragile economic environment, every player is expected to develop iron teeth to break the hard nuts in the core banking business .

This may not be farfetched . While the number of services a modern commercial bank offers has increased immensely ,risk taking ,which is fundamental nature of banking remains unchanged .Its inherent in the maturity transformation which is another fundamental feature of banking, where the the men are separated from the boys .In these circumstances bank management becomes coterminous with risk management. Bank management ,in other words ,banking which is no more than managing risks—the risk of mismatches between assets and liabilities and between borrowing and lending rates ,is critical to each player’s strategic position and a function of each player’s strategic capability . 

Consequently , to outperform competitors , a player in this industry needs core competences in risk management particularly in a fragile economy currently with increased default risks .Another big challenge is the capability to put in place a robust fund transfer pricing ,a method used by bankers to evaluate the profitability of deposits and loans.

  CORE BANKING : HOW ZENITH DRIVEN BY CORE COMPETENCES BREAKS THE HARD NUT .

A detailed analysis of its third quarter for the financial year 2023 confirms Zenith Bank’s impressive skill sets or core competences could be pinned down to its inspiring industry leadership . With a deft application of management’s experience beginning from leveraging net interest income to cost optimization , Zenith Bank is sure to retain its industry leadership in terms of profitability and market value . 

By hauling  up its net interest income by 72 percent to N670.93b from N390.56billion, Zenith Bank has demonstrated its feat for squeezing water from a stone in an inclement environment troubled by inflationary pressures and other macroeconomic turbulence . In the year under review , it became a tug of war for banks to navigate and break the metaphorical hard nuts which interest and credit rate risks constituted in the period under review .

 In fact , both of them became the potential spoilers for this bank .Though both interest income and expenses moved in the same direction , the bank’s interest expenses skyrocketed to hit N255.70b from N108b , a 237 percent increase while interest income increased by 72percent .Despite this , Zenith Bank grew its interest income because of the growth in risk assets as well as the effective pricing thereon. The bank gave out loans and advances worth a hefty N6.01 trillion, 48 percent more than the previous year when N4.12trillion   was applied.  

Also its  impressive fund transfer pricing skill sets ,  a method used by bankers to evaluate the profitability of deposits and loans, is  believed to be critical to its exploit in the core banking business of financial intermediation ..

 By this  ,the damage done to the bottom line by the rising interest expenses is minimized by the absolute figure of its interest income considered to be massive enough to reduce its negative impact. The bank almost doubled interest income . Though the interest expense was hot in chase at an even faster pace , however , the rather exuberant pace couldn’t do much  damage because of its Lilliputian stance against the leviathan of interest income. 

As regards the credit risk , on the face value , though the bank’s impairment charges on loan loss became the real spoiler to the bottom line rising from N37b to N210b within the period under review, however, this was a mere and deliberate policy of the bank . Though this caused the cost of risk to deteriorate from 1.3% in Q3 2022 to 5.5% in Q3 2023, however this is an improvement from Q2 2023 where cost of risk printed at 8.8% because of prudent management of our risk assets.  

The provision could be traced to the fragile economy which has increased the banks’ default risk and justified the need to increase provisions for dodgy loan assets.Analysts expect the credit-impaired charges to remain elevated due to ambiguity surrounding monetary policy, disposable income squeeze and exchange rate fluctuation that can influence financial assets value . Sequel to this , the cost of risk  increased significantly   5.5 per cent in the   year 2023   from   1.3 cent in 2022.

But the aggressive provision was a deliberate policy of the bank . The bank explained that the impairment levels increased due to the deliberate incremental provisions necessitated by its conservative approach towards the heightened risk environment and the creation of a counter-cyclical buffer needed to deal with any impending volatility of exchange rates. 

Despite that huge provision , it  is worth noting that the Zenith Bank has a healthy risk asset portfolio as it adopts a holistic and integrated approach to risk management and therefore, brings all risks together under one or a limited number of oversight functions.

Its non performing loan ratio decreased  to 3.8 per cent in  2023 from 4.3 per cent in 2022.This is   within the regulatory threshold and far below industry peers. A low NPLR reinforces public confidence in the banking system ensuring prudent lending practices thereby preventing adverse impacts on the bank’s financial health.

In the same breadth, coverage ratio increased by 54.7 per cent  to 179.4 per cent to 115.9per cent over the same period, an indication of prudent disposition consistent with the bank’s known record of excellent credit risk management.

NON INTEREST INCOME AS A BIG GAME CHANGER

However , the growth in profit is not only attributable to the interest income alone but to the twin effects of the improvement in interest and non-interest income.

Consequently , the above threats to the bottom line prompted by bank’s provision for loan loss impairment charges not withstanding, the bank has shown it is unstoppable . As , a good manager of a financial institution , the management revved up its non interest income items of its balance sheet as they hold the key to stabilizing earnings especially at a time the world or country is in recession and interest rate volatility is a factor to abort those potential spoilers .

 Its non interest income segment grew by 186% from NGN212 billion to NGN607.2 billion . The non-interest income growth is largely driven by the revaluation gain due to the unification of exchange rates during the year. Zenith Bank recorded N378.12b in the third quarter compared to N11.14b in the corresponding period of 2022 as its foreign currency revaluation gain .Moreover, the bank has ramped up technological integration by developing different products and services to meet customers’ evolving needs, the services include mobile banking, internet banking and other electronic value propositions to boost its income .

 Zenith Bank’s profitability maximization constituent with its liquidity ,solvency and regulatory constraints could also be linked to its management wizardry in acquisition and allocation of funds .

The marketing machine of the bank, it would seem is working overtime, growing deposits; that section of the bank’s balance sheet swung up  49percent from N8.98 trillion to N13.38trillion.

This was to be expected from a bank which ‘focuses and channels its resources only on its core corporate and retail banking activities’, activities which require steep marketing capabilities, and in a world where IT is ubiquitous, a firm understanding of delivering tech based services.

But as deposits grew, the bank could not restrict the comparatively faster pace of loans and advances, a key component of a bank’s maturity transformation tool. The bank gave out loans and advances worth a hefty N6.01 trillion, 48 percent more than the previous year when N4.12trillion   was applied.  

We note though that the bigger this item on the balance sheet, the higher the interest income item on the income statement and then the higher the variability or the higher the credit risk.

How did these three items play out in the case of Zenith Bank? Interest income shot up while  credit risk stabilized at  46percent .The bank took such a cautious risk step despite the confidence of a healthy balance sheet despite the fact that all its assets and shareholder funds can cover for any slips.

The Bank assets which grew 48 percent  is 1.4 times the deposits level , the same  1. 4 times  the year before.Shareholder funds grew 39percent to  N1.92 trillion billion from N1.38 trillion  

 Consequently , the bank’s balance sheet was robust as the loan to deposit ratio, liquidity ratio and capital adequacy ratios were  45.6per cent, 61.2 per cent and 20.1  per cent respectively,   

The Strategic Directions  and Choices Behind Zenith’s Leadership

 What could be driving the tenacious hold of a bank on an industry leadership as seen from the above? This is usually the question making wave when a bank’s unique  industry leadership becomes a subject of discussion among the industry stakeholders.But the secret of a corporate champion like Zenith Bank may not be farfetched. Naturally, the survival and success of any organization is usually influenced by its ability to respond to the competing pressures from the changes in the business environment, its strategic capability or its resources and competences as well as its cultural and political contexts under which it is operates . Zenith Bank’s management from all indications is not oblivious of the above challenges .

In fact , market watchers hardly faults the bank’s growth trajectory given its strategic capability as the bank ramped up its top and bottom line. Analysts are unanimous in their opinion that the bank is led by a unique management with appropriate strategic capability.

The bank has been proving that it has what it takes to navigate the inclement operating environment since its inception. Zenith Bank has distinguished itself  a technology and service-driven financial institution. The bank also took its pride of place in Internet Banking in Nigeria being the premier truly online bank, pioneering Internet-enabled banking and achieving numerous firsts in application of Information Technology to banking services.

 To these analysts , its  management  headlights is believed to be  shining farther out than those of its competitors ;endowed with a leadership with a clear and broadly shared understanding of how the industry may be different in the future  and led by a management whose views about the future is competitively unique; sequel to these , the bank has become unstoppable. Beyond this , its management is believed to be fully alert to dangers posed new unconventional rivals , it is the type that  ensures the task of regenerating core strategies is receiving as much top attention as the task of re engineering core processes ; Zenith has  a management that  is more an architect than maintenance engineer, with more improvement efforts on creating advantages new to the industry than catching up with its competitors.  

With the above skill sets ,  the bank has enhanced value for shareholders through a larger capital base, enhanced scale of operations, strong corporate relationships, entry into new business segments, larger market share and access to the vast talent pool  

The Bank has leveraged on its competences in Information Technology and now plays a key role in the deployment of e-Banking solutions to serve the Retail banking segment. Today the Bank has strong structures that are driven by efficiency, robust risk management and highly skilled human capital.

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