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How Zenith Bank Expands Profit From Slow Earnings

Brilliant earnings power  and valuation multiples driven by  strong fundamentals remain  the secret of  Zenith bank’s sustainable   market leadership .

Zenith Bank, Nigeria’s biggest bank by profitability and the most valuable bank currently by market capitalization  , had gross earnings slowing in the first quarter of 2021  .  However it wrenched up bottom line with a deft application of management’s experience   by leveraging interest expenses and non- interest income ;  interest expenses were managed down as the bank’s stock of low-cost deposits increased, with interest paid on time deposits declining. 

This feat remains a solid and strong factor driving its  market value over years .  Zenith Bank is currently the most valuable among its peers with market capitalization of N₦726.8b . This is a function of price and the number of outstanding shares . The bank has continued to create massive wealth through share price appreciation and stability .  In terms   of market  share price return ,  the bank with a return of  39%    exceeded  its   industry which returned 21.3% over the past year. .    Asides this  ,  its share price has remained stable in the past one year . ;   it  is not significantly more volatile than the rest of stocks over the past 3 months, typically moving +/- 4% a week.  Its  weekly volatility (4%) has been stable over the past  one year

    Not only that , it has continued to do the same via returns on dividend  . Over the past  one year, its dividend return was  58.8% against share price return of   39.0% compared to the industry dividend and share price  returns of  32.7%  and  21.3%  respectively . However, while the   bank   over performed the market  in terms of dividend  return  with   53.7%  it under performed it at  44.9%  in share price return .When its dividend returns are viewed over three and five years , Zenith Bank over performed both the  industry and the market  with its dividend returns  with its  34.5%-and 170.9% records respectively compared with the industry and market average dividend returns of   8.1%  and 7.6%- in the past three years  and 70.7% and  27.6% in the past five years – respectively

   The above benefits to investors are delivered by its strong earnings power ,. Over the past 5 years , its  historical annual earnings growth stood at 14.4%   just as its   current net profit margins  at 44.9%  are higher than last year  43.3%)

   However  its  earnings growth over the past year  of 11.4%  is below its 5-year average  at 14.4% per year  . But its earnings growth over the past year  of  11.4%   exceeded the    industry average of  1.6%. .  

 . Its strong fundamentals consequently delivered sterling valuation multiples that are behind the bank’s market and industry leadership . . Zenith Bank is  considered a good value by analysts  based on its PE Ratio  3.1x  compared to the   industry average  4x .and  also a good value based on its PE Ratio (3.1x) compared to the   market  average of  7.9x   . The bank  is good value based on its PEG Ratio  at  0.3x  as every multiple below one is considered good by analysts

  At   its PB Ratio  of 0.7x   compared to the   industry average  0.4x  , it follows the industry trend selling at discount to its  book  value . . However ,while its   Return on Equity   at  21.35%  is high, this metric is skewed due to their high level of debt

 : With its reasonably low payout ratio  at 40.4%   ZENITHBANK’s dividend payments are well covered by earnings. ZENITHBANK’s dividend yield at  12.96%  is higher than the bottom 25% of dividend payers in the  market   at 3.78% ;   its  dividend  at 12.96%   is in the top 25% of dividend payers in the NG market (7.86%) ; its  dividend payments have increased over the past 10 years.

 The above  sterling performance  at the market level  is an outcome of its brilliant fundamentals  which its first quarter  performance in 2021 also confirmed . By hauling  up net interest income  marginally by  2%     to    N83,168  in 2021  from     N81,501  , Zenith Bank showed that it’s not what you get but what you make out of it that matters. Revenue had had a slip by -6%   from N166.8 billion in Q1 2020 to N157.3 billion in Q1 2021. The decline in the top line was due to the prevailing low yield environment that was prevalent within the quarter which affected the yields on marketable securities and the pricing of risk assets; this led to a reduction in interest income from N114. 3 billion to N101.2 billion. , a potential spoiler.

But after suppressing interest expenses  seismically  by  45%   to N18,008 from N 32,829    gave the net interest income a positive outlook    ; net interest income  is a guide to how well a bank manages the interest rates it pays for borrowing and lending  . The low yield environment however  accelerated the downward re-pricing of interest bearing assets which in turn led to a 22% compression in net interest margin (NIM), decreasing it  from 7.7% to 6.0% in the current period

But Non-interest income rescued the bank from the potential spoiler . Non-interest income  grew to 51,201  from 46,639 , a 10% increase .  It was boosted by the increases in fees and commission income which resulted from increased volume of transactions across all  its  channels ; this was as a result of growth recorded in credit related fees and fees on electronic products  

The first quarter result is the beginning of another attempt to wring good profit as was done in the last financial year, in its attempt to reaffirm leadership of the sector   The bank  achieved  a slight  reduction in impairment charges;  ; these  charges improved marginally by -2.43% in Q1 2021 to N3.86bn from N3.95bn in Q1 2020   ,re-affirming the bank’s enhanced asset quality. In the same breadth,  coverage ratio  increased by 2%  to 114.0% from 112.1% 2%   over the same period, an indication of prudent disposition consistent with the bank’s known record of excellent credit risk management  .

Operating expenses rose but were restricted  to  N69,492   from  N65,401   an increase of 6%

 . Moreover ,as a result of the  inclement  operating environment   , the bank’s cost-to-income ratio  increased marginally by  1%   to   53.2%   from  52.7% 

    Despite   these forces , its Pre-tax profit of the leading bank, buoyed by  4%  to  61,022  from 58,788 4%   .This helped  to shoot up pre-tax profit margin to  38.8 percent, up from 37.5  percent. with that rise in pre-tax profit, the bank’s net profit flew by 5  percent to   N53,060   from  N50,526  , leading to a rise in net profit margin to  33.7 percent from  30.3  percent.

To cement its place as the most profitable bank, return on Average  equity , ROAE ,  stood at  (ROAE) 19.2%    and return on assets (ROA),   stayed at  2.5 % Also, the bank’s robust risk management framework ensured that the cost of risk reduced  marginally  from   0.6% in March 2020 to 0.5% in March 2021  

 Cost of risk dropped   which is a testament to prudent risk management, even as gross loans increased marginally by 2% from N2.92 trillion to N2.98 trillion in Q1 2021     The bank’s non-performing loans ratio  also   declined  marginally by 2%  to 4.20%  from 4.29%   This  is still within the regulatory threshold and far below industry peers. The profitability was driven by optimisation of  its  cost of funds and improvement in non-interest income. Cost of funds reduced significantly from 2.6% in March 2020 to 1.1% in March 2021..

The bank’s balance sheet was robust as the loan to deposit ratio, liquidity ratio and capital adequacy ratios were  52.6%    , 70.0% and   21.1%    per cent respectively, all well above the regulatory threshold. 

  Its  Assets to Equity ratio  at 8x  is low ,indication that it is using less debt for its operations  . .

 However the  75% of  the bank’s liabilities are made up of primarily low risk sources of funding. ;  its  Loans to Assets ratio  of 34% is considered to be appropriate   just as its  Loans to Deposits ratio  of 53%  .However, the  bank’s  bad loans  at 6.1%  is considered to be high bank   and its    allowance  of 76%   for bad loans  is believed to be low 

  The bank’s total assets grew by   2 per cent,   to 8,682,815  from 8,481,272 while shareholders’ fund   declined  marginally by 2  per cent    to  1,091,826  from  1,117,473    Despite its slight decline ,  for  such weighty shareholders’ fund, it is natural to pull in heft deposits  But it was the bank’s ability to meet and surpass regulatory guidelines  that was the highlight of the  first quarter    2021  results.

 . In 2018, costly deposits were foregone in favour of cheaper and more stable deposits resulting in a reduction of expensive and shorter dated deposits by N110 billion. This culminated in the reduction of cost of funds which declined by 40 per cent from 5.2 per cent in 2017 to 3.1 per cent for the year.

The bank   deposits grew by 6% from N5.34 trillion in December 2020 toN5.68 trillion in March 2021 with the savings account balance, which is solely retail delivering a N54 billion increment providing it with a platform to rebalance its deposits mix  Its robust customer acquisition strategy and the effectiveness of our electronic platforms and digital channels has enabled  the bank  to deliver whooping amount saving account increment  .   .The transactions on  its  electronic channels are also growing astoundingly as new customers continue to be attracted to  its  user-friendly digital platforms. The results were a testament of the bank’s efforts to deepen its roots in the retail segment.  This has led, in the main, to a remarkable increase in the volume of transactions across various electronic platforms as well as significant customer acquisitions. This growth in transactions on the bank’s digital channels continues to support the bank’s retail push as fees from e-products  continue to increase .    The bank also stated that it would continue its investment in the retail end of the market to consolidate its leadership in both the corporate and retail segments

Going into 2021, the expectation is that the ongoing economic recovery and improvements in the yield environment will translate into improved numbers for the Group. This will be supported by local and international COVID-19 vaccination campaigns, rising commodity prices, and global economic growth of up to 6%, as estimated by the International Monetary Fund (IMF). The Group will continue to position itself to take advantage of these positive developments and deliver improved financial performance and returns to all its stakeholders.

 The  management has assured shareholders of the bank’s commitment of continuing to deliver superior returns in the years ahead.    Zenith Bank remains a clear leader in the digital space, with several firsts in the deployment of innovative products, solutions and an assortment of alternative channels that ensure convenience, speed and safety of transactions. “To continue to cater to the varied appetites of our customers in a constantly changing world and stay ahead of the competition, therefore, we have invested massively in new technologies and innovative solutions in the last financial year. This is geared towards ensuring that we continue to provide best in class quality services that create value for all our stakeholders,”   a top manager of the bank  said, noting that Zenith Bank made significant progress in the adoption and integration of sustainable banking principles into its business, especially in its credit administration process.

 Consistent with this excellent performance and in recognition of its track record of stellar performance, the bank was recently ranked as the Most Valuable Banking Brand in Nigeria in 2018 by The Banker Magazine. Similarly, Zenith Bank was recognised as the Best Corporate Governance Bank in Nigeria by The World Finance for the sixth time just as Ethical Boardroom, a Europe based Boardroom watchdog reaffirmed this recognition by naming Zenith Bank as the Best Bank in Corporate Governance in 2018. Recognition has also come the way of the bank as it was recently named the Best Institution in Sustainability Reporting in Africa 2018 (SERAS Awards) and the Bank of the Year 2018    

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