Stanbic-IBTC 2024 :Displaying Uncommon Resourcefulness

Stanbic-IBTC deployed its iron teeth to break the operating environmental metaphorical hard nuts to create the best value for money among Tier 2 banks in Nigeria in the first nine months of 2024.

In the last financial year as it was the one before, and indeed many more years back in time, the competitive and operating space in the financial industry had been paved with serious obstacles, setting up the industry for failure. In the current one, it is not different. Rather, it is becoming more challenging with elevated levels of inflation and hawkish monetary policy from the regulatory authorities.

The challenge of the above inclement operating environment compounded the traditinal internal issue of managing the risks faced by every bank management, particularly the ardous task of balancing and reconciling the bank’s obligations to the deficit,surplus,regulatory authorities, shareholders and the community at large that is highly complicated and made more difficult by the change in the environment in which it operates.

But the inclement external operating environment where banks do their businesses in Nigeria and some internal challenges notwithstanding , few smart and visionary leaders in the Nigerian banking sub sector appeared to have developed iron teeth to break some metaphorical hard nuts in the operating environment ; all in a bid to satisfy their obligations to those five critical constituencies , they robustly exploited opportunities and heavily minimized the prevailing threats to deliver very inspiring performance in the period under review. . .

.Stanbic-IBTC’s leadership , one of these few , indeed , lived up to this necessity and created better value for money for its stakeholders in the last nine months of 2024 . With its superior strategic capability –unique resources and core competencies —Stanbic-IBTC was able to maintain its competitive advantage and outperformed competitors as reflected in its ability to meet certain critical success factors in the above constituencies.

A detailed analysis of how the above were achieved in the last nine months show the above challenges were merely the opportunities for the bank to turn adversity to some advantages ; indeed, it lived up to its obligations to the key constituencies in banking business with maximum satisfaction

No doubt , the bank achieved resounding successes in the most critical aspects of its business , driven by its strategic capability. Obviously , the shareholders were satisfied with maximum and adequate returns on their investments in order to let them remain invested in the bank and to be willing to continue to provide additional resources and when needed

Delivering Better Value for Money

While the activities in the deficit ,surplus,regulatory and the operrating community constituencies are critical success factors in banking and contribute to its overall growth and success , a bank ‘s capability to create and deliver better values for money for the shareholders is what separates the champion from the others in this industry . And this is what stands STANBIC-IBTC out from its peers ,driven by its uncommon resourcefulness.

STANBIC-IBTC , Nigeria’s  most efficient Tier 2  bank  had its gross earnings revved up  in the first  nine months of 2024   and wrenched up bottom line with a deft application of management’s experience beginning from leveraging net interest income .This first confirmation of this is reflected in its superior profitability In the period under review, its Profit before tax inched up by 72% to ₦222.93 billion as against ₦129.46 billion in 2023 while its Profit after tax of ₦182.87 billion, up 67% compared to ₦109.25 billion in 2023 .

But delivering value for money goes beyond the absolute profit figures highlighted above .For the shareholders, to deliver a better value for money is not restricted to making bigger profits or the biggest profit relative to the competitors but how competent a company is at managing its cost .Moreover , shareholders are not only interested at what cost or how efficiently such a profit is made ,but also how effectively certain product or service features are delivered or its ability to meet its stakeholders requirements on product or service features at a given cost .For Stanbic bank, both expectations were met for its stakeholders .

Though these are usually not without their challenges. To achieve the latter feat , managers of an organization must be clear about which product or service features will be valued in the future and understand the drivers of uniqueness of such products or services within the organisation or value system .A company must also be innovative to sustain what its stakeholders value, since what they value varies with time.

It is as well imperative for its managers to secure core competencies that will allow them to build strategies in new markets through stretching and exploiting of such competencies since such values are likely to attract better for the company in a new environment or market.

Stanbic IBTC leadership is not oblivioous of the above and other corporate challenges . It is glaringly clear from its business model that it goes for resourseful over resources, driving its operations efficiently and effectively. And the result is clear : while the bank emerged the most profitable among its peers, the real beauty of its performance lies in its uncommon resourcefulness and the quality of the services and products delivered to its shareholders relative to others .

In other words , the bank is not ignorant of the fact that the shareholders are not only after absolute profit, but the cost at which the profit is secured. This is where Stanbic-IBTC has displayed its resourcefulness better than its peers.

Cost Optimization

With facts and figures over the years Stanbic Bank highly efficient profit machine . It delivered values to its shareholders at a Cost to income ratio of 39.4% compared to 46.9% in the first nine months 2023.

The bank was able to maintain this feat with its capability to leverage its resources to gain better value for money with its core competencies in some strategic areas of its business. The key message from the leadership of this bank to its competitors with bigger financial resources or assets is crystal clear : bigness without stretch and Just as bigness without stretch and leverage is obesity, smallness without stretch and leverage is impotence .Only a super bank with an efficient profit machine could deliver this feat in an inclement operating environment like Nigeria. With this CIR , the bank is not only meeting the threshold level value but outperforming its peers in critical areas .

Certain performance indicators confirmed its uncommon resourcefulness .To cement its place as the most profitable bank, its post-tax return on equity (ROAE), and return on assets (ROAA), improved to 42.9% per cent and 4.1 % per cent in 2024 from 33.2% per cent and 3.9% per cent respectively in 2023.

This profitability translated to Earnings per share of 1,390k from 825k , the value of earnings per outstanding share of common stock of the company and an ndication of a company’s profitability that shows how much money a business makes for each share of its stock.⁸

Stock Price Driven By Efficient Profit Machine

The positive impacts of the bank’s efficient profit machine are clearly visible on its stock.Though its stock has seen a 15% year-to-date (YtD) decline as of September 4, 2024, this is an improvement from the 19% dip recorded in August 2024. This recent recovery suggests that investor sentiment may be stabilizing, providing a potential opportunity for those considering buying the dip.

The significant improvement from August’s dip indicates a positive shift, which could signal a rebound in investor confidence. For context, the stock had previously surged by 108% YtD last year, highlighting its potential for substantial gains. This recent downturn and subsequent partial recovery may reflect broader market adjustments rather than underlying issues with the company itself.

Looking ahead, Stanbic IBTC’s strong financial performance suggests it is positioned well to navigate the current challenges facing the banking sector. The company’s strong growth in earnings and pre-tax profits suggests it has solid fundamentals.

Analysts remain optimistic about Stanbic IBTC’s ability to leverage its strong performance to drive future growth, despite the sector’s recent underperformance.According to the NGX’s brokers’ recommendations of September 2-6, 2024, the ratings vary: Bancorp Securities advises a “Hold,” Afriinvest suggests “Accumulate,” and Meristen provides a “Buy” rating. This range of recommendations reflects differing perspectives on the stock’s potential.

Overall, the ratings suggest a generally positive outlook for Stanbic IBTC, with analysts recognizing its strong financial performance and growth potential. The “Buy” rating from Meristen signifies high confidence in the stock’s future performance, while the “Accumulate” and “Hold” ratings reflect a more cautious but still favourable view.

Similarly, Stanbic IBTC’s first half of 2024 earnings release reinforced its strong position with a notable statement: “Stanbic IBTC retained its Fitch AAA (nga) rating, reaffirming our position as the only financial services provider in Nigeria with the highest rating from a global rating agency for over two decades.”in addition to these strong ratings, it is essential to consider the stock’s trading activity and volatility. Over the past three months (June 5 – September 4, 2024),

Stanbic IBTC Holdings has been the 49th most traded stock on the Nigerian Stock Exchange, with a total volume of 98.9 million shares traded across 3,230 deals, valued at N5.25 billion. This trading volume indicates good investor interest and activity, which often correlates with increased volatility.

While volatility can create opportunities to buy at lower prices, it also introduces risk. However, the stock’s low beta of 0.362 may provide reassurance, as it suggests lower volatility compared to the overall market.This indicates that the stock is less likely to experience large price swings relative to market movements. Consequently, the lower beta can be a sign of stability, potentially mitigating some of the inherent risks associated with the stock’s volatility.

Overall, given Stanbic IBTC’s strong financial fundamentals and recent signs of stabilization, the current dip might present a favourable buying opportunity.The stock is currently trading below its 52-week high of N80, achieved on October 13, 2023, suggesting potential for future gains as market conditions improve. This performance suggests strong investor confidence and positive sentiment towards the stock, primarily based on its financial performance.

Strong Valuation Power

One of the most popular valuation metrics is the price-to-earnings ratio (P/E), which measures the share price of a stock as a multiple of its earnings. The closer this figure is to one or below one, the cheaper the stock. Using Stanbic ’s current share price of N56.80 and its trailing twelve months earnings per share (EPS) of N16.27 the stock has a P/E ratio of 3.5x. This compares to the banking sector average of 13.9x.This lower P/E ratio suggests that the stock is undervalued compared to its peers, indicating that investors are paying less for each unit of its earnings relative to other banks. This could be seen as an opportunity for investors if they believe that Stanbic ’s earnings will continue to grow.

Another valuation metric is the price-to-earnings growth (PEG) ratio, which adjusts the P/E ratio by the stock’s earnings growth. Similarly, a PEG below 1x suggests that the stock is undervalued relative to its earnings growth potential and may offer attractive growth at a reasonable price, appealing to growth-oriented investors.Boosted by its recent performance, Stanbic has a PEG ratio of less than one, making it attractive for growth-hungry investors.

Additionally, the group’s strong capital assets appear to be reflected in its higher price-to-book ratio of 0.70, compared to the banking sector average of 0.63.This suggests that investors value each unit of Stanbic ’s book value more highly than that of its peers, possibly due to perceived higher asset quality or expectations of better future profitability. The expectation of better future profitability also aligns with its higher price-to-sales ratio of 1.5x compared to the sector average of 0.52x.

Stanbic’s valuation metrics, including a low P/E ratio, a reasonable P/B ratio, and a relatively higher P/S ratio, combined with a very low PEG ratio, suggest that it might be an attractive investment, especially for those looking for growth opportunities at a reasonable price.

Strong Dividend Payout and Yield

Besides valuation dynamics, Stanbic is known for its impressive dividend payouts. For the period ending December 31, 2023, the group paid a final dividend of N2.20 per share to its shareholders, totalling N28.5 billion.

In September 2023, the group had distributed an interim dividend of N1.50, amounting to N19.4 billion, thus reaching a total dividend payout of N47.9 billion for 2023, a 6% rise from the N45.4 billion paid in 2022.

The stock currently has a dividend yield of 7.4% based on its current share price, and a dividend payout ratio 26 % of . Continuing this trend, the bank is expected to declare a better dividend for the financial year ended 2024 , enhancing its appeal as an investment, especially for income-oriented investors.

Strategic Capability

But the feat highlighted above is not for the dillitantes but of the corporate champions .Only a company’s leadership with a superior strategic capability — an ability to perform at the level required for success —could deliver the above inspiring returns to its shareholders. It is usually about a company that has the ability to come up with the strategies that fit the operating environment ,opportunities and threats ;it is also about changing the strategic capability better to fit the changing environment,

Moreover, only a company with innovative leadership that could leverage its capability to become leading edge of its strategic developments —-all in a bid to create new opportunities and exploit other opportunities by stretching and exploiting its capability either in ways that its competitors find difficult to match or in new directions or both– can outperform competition and deliver better value for money. . In a hyper competitive world , the only enduring capability is the ability to change the strategy as the basis of competition moves on through different phases of the cycle of competition. The above initiatives are the secrets behind Stanbic IBTC industry leadership. Over the years, Stanbic-IBTC has demonstrated the above capabilities with the necessary unique resources and core competencies that help it to outperform its peers.

How Stanbic IBTC delivered better value for money in the first nine months of the financial year 2024 is not unclear. The first indicator could be traced to its unique resources deployed with its core competencies to exploit available opportunities and minimize the prevailing threats .

Typically, the resources ideployed by an organisation to generate competencies range from physical , human ,financial to intellectual. However, since the financial resources , represented by the balance sheet , reflect of the bank’s management’s view ,skill and public face and serve as the means through which other resources are secured.

For Stanbic; its balance sheet show its basic health to be superb with outstanding liquidity as the bank is growing with its capital properly balanced in its various parts and of the right size for the business being undertaken,; he bank has continued to build its financial resources consistently and competitively; the bank is becoming more and more formidable as it is conveniently acquiring other resources , growing its branches across the country, acquiring knowledge and skills of people as well as capturing knowledge in brand, business systems, customer databases and relationship with partners.

Most importantly, its asset and liability management greatly aligns with the conventional wisdom and basic objectives of maximizing profitability consistently with liquidity,solvency and regulatory constraints.

Critical Success Factors

Living up to the above shareholders obligations by delivering mouthwatering returns to them and outperforming its competitors is not an easy task . It requires the capability for overcome the challenges posed by certain critical success factors considered to be the product or service features that are particularly valued by a group of stakeholders ranging from cost optimization, risk management, liquidity , innovation , capital adequacy , profitability to efficient service delivery. No doubt, this is where the champion like Stanbic IBTC is separated from the threshold players.

These are clearly reflected in Stanbic capacity in using technology to improve efficiency, reduce costs, and offer faster and more secure transactions, delivery of high levels of customer satisfaction , high compliance to the regulatory demands and security , possession of competitive width and depth of a bank’s product and service line , low costs operation , possession of strong reputation , manpower ,financial management and strong physical and intangible asset base.

RESOURCES

The Figures That Deliver

Its Total assets deployed increased by 41% to ₦7.26 trillion (December 2023: ₦5.15 trillion) To fund the above assets ,it tackled the surplus units from which it borrows skillfully to finance its asset base .With an appropriate strategic capability the bank was able to offer the best possible term in rates of interest and maturity structures as well as maximum liquidity that gave the depositors the confidence to patronize the bank and assured them of getting their funds back when they want them , or as agree . Sequel to this , it recorded a phenomenal increase in deposits .Customer deposits increased by 50% to ₦3.12 trillion (December 2023: ₦2.07 trillion) while deposit mix improved to 81% (December 2023: 72%) of current-and-savings-accounts. Out of the total Liabilities of N6.63trn in 2024 , its customers deposit contributed N3.12 trn compared N2.07trn of the N4,64trn total Liabilities in 2023

But while its capability to grow its resources is commendable, to outperform competition is beyond that . Though important. the truth is that the possession of resources or  its volume is  not all it takes to deliver a better value for money

COMPETENCIES

but its competency at deploying the resources..Possession of resources does not guarantee strategic success. Because strategic capability is essentially concerned with how these resources are deployed, managed ,controlled and in the case of people motivated to create competencies in those activities and business processes needed to run the business. People are at the heart of strategy .The knowledge and experience of people can be the key factors enabling the success of strategies .But they can also hinder the adoption of new strategies too .Human resources may hinder strategy if they are not tailored to the types of strategies being pursued . Where strategies are built around high rates of innovation in products or services bureaucratic recruitment procedures may deter entry of creative individuals Nevertheless, the starting point of successful strategies is acquiring ,retaining, and developing resources of at least threshold standard and this clearly applies to the people as a resource.

Stanbic leadership in the first nine months of 2024 proved itself beyond any doubt regarding its capability. Its financial resources were subtly allocated to achieve its basic objectives of maximizing profitability consistently with liquidity,solvency and regulatory constraints. First , the bank addressed the deficit units which borrow from it as it deployed enough funds to that constituency, aided mostly by its maximum liquidity and the desire to deepen its maturity transformation .

The deficit units which borrowed from the bank were kept satisfied ,benefiting from its capability to build its total assets aggressively over the years ; its Gross loans and advances increased by 18% to ₦2.48 trillion relative to its December 2023 amount at ₦2.09 trillion while net Loans and advances grew by 29% to N2.43trn from N2.04trn

Not only deficit units , Cash and cash equivalents also increased by 73% to N 2.41trn from N1.39trn while its Trading assets inched up by 880% to N666b from N68b and its Financial investments grew by 75% from N436b to N763b . Other assets also grew by 57% to N318b from N203b

However , it is not only volume of the assets funded by its Liabilities that is significant to the leadership of this bank but its deployment that finally generates competencies. How the resources are effectively and efficiently deployed and how risks are managed .Mostly importantly ,its very strong managerial savvy for managing the risk taken to satisfy the regulatory authorities ,whose interest is to ensure that the bank does not undertake excessive risks ,provided further advantage to deliver above the expectations of its stakeholders.

,Also, the volume of its transactions and treasury quality determine the capability for satisfying the shareholders that require maximum and adequate returns on their investments in order to let them remain invested in the bank and to be willing to continue to provide additional resources .

OPERATIONS.

Maturity Transformation

The most critical test of a bank’s leadership rating is how its delivers values from the conventional act of maturity transformation, an act of banks accepting traditionally short-term deposits and using them to make loans that will not be repaid for years. This is sequel to the fact it creates an operating risk for the bank, which must be managed in perpetuity .The issue is that bank management is no more than managing risks—the risk of mismatches between assets and liabilities and between borrowing and lending rates . This is more so because, like other items in the balance sheet –capital ,reserves , investments ,etc ,the importance of loan portfolio derives from the functions lending performs for banks is the most criticaldeterminant of every bank’s fortune .. Loan is ,for instance , the highest earning asset in the balance sheet ; it contributes materially to the achievement and fulfillment of the objectives of profitability by providing higher return than other financial assets ; it helps the bank management to satisfy the legal and regulatory objectives of the monetary authorities .It is a key element in the creation and maintenance of depositor relationships ,particularly with the business firms ; it is a vehicle through which management attempts to satisfy the credit needs of the community or the credit markets the bank serves or intends to serve

And it is the Net Interest Income that is generated from lending activity and interest-bearing assets —the “net” return derived from the interest income minus the cost of funding the loans—-that exposes the strength or weakness of a bank’s leadership. .

But it is also the most challenging issue before any player . The problem is that NII is sensitive to both credit and market risks and only those that are highly and strongly proficient in managing these risks that could deliver to the stakeholders expectations. The market risk , essentially interest-rate risk for loans and deposits , driven by the maturity structure of the loan book, is about managing the match (or mismatch) between the maturity of the loans against the maturity of the funding . And fund transfer pricing ,a method used by bankers to evaluate the profitability of deposits and loans ,is one of the critical skills that delivers Net Interest Income .

However , fund transfer pricing is known to usually pose a serious challenge to bankers . First ,the challenge, in the case of the deposits is that when bankers evaluate the profitability of deposits, they know the cost – the interest to be paid on those deposits and the associated operating expenses (such as employee time and IT) but not the return . And for loans, the problem is symmetrical. Bankers know the return on loans, that is, the interest income (net of the expenses incurred by bad debts), but not its funding cost. The reason in this case is that banks use several sources of funds to finance assets (such as demand deposits, savings deposits, time deposits, corporate deposits, interbank deposits, subordinated debt, and equity).

In the first nine months of the financial year 2024 ,Stanbic-IBTC’s ,no doubt , engaged its unmatched savvy for managing the market risk ,an essentially interest-rate risk for loans and deposits, that is driven by the maturity structure of the loan book which is imperative for resolving the match (or mismatch) between the maturity of the loans against the maturity of the funding known as the interest-rate gap

But this was not without any threat from the highly inflationary environment. Although, its Net interest income which is sensitive to both credit and interest rate risks inched up phenomenally to ₦251.85 billion, up by above 100% from ₦120.50 billion in the corresponding period of 2023, its interest income was hindered from contributing optimally to the bottom-line simply because both interest rate and credit risks resisted the ambition to boost the bottomline optimally as they became hard nuts difficult for it to break. While its interest income hit N425.78b from N184.59b , up by 130.7%, its Interest expenses skyrocketed to N173.93b from N64.09b at a faster pace of 169% threatening its bottom-line dangerously .

For a better understanding of the challenge of the rising cost scenario it took the bank N41 to get every N100 of its interest income in 2024 , it only took it N34 in the corresponding period of 2023 .The excessive growth of its interest expenses was not the only potential spoiler, the bank became almost helpless in its battle of the credit risks as its impairment charges rose heavily to N59.38bi from approximately N10billion .

But the bank’s leadership was smartet as it exploited the non interest segement to frustrate the above potential spoilers .

First , the bank generated high volume of fee income from the provision of services to customers to rescue itself from those potential spoilers . Fee income is very popular with bank senior management because it is less volatile and not susceptible to market risk like trading income or NII. There is also no credit risk because the fees are often paid up front. There are other benefits as well, such as the opportunity to build up a diversified customer base for this additional range of services

Stanbic IBTC with deft application of its experience and professionalism boosted its Non-interest revenue by 50.8 percent to N214.01b from N141.96b with Net fee and commission revenue contributing more than half at N124.64b compared to N 79.53b in 2023 after fee and commission expenses of N9.74b and N5.07b of 2024 and 2023 respectively were deducted from its fee and commission revenue of N134.38b and N84.60b between 2024 and 2023 respectively.

The bank also generated a high level trading income through trading activity in financial products such as equities (shares), bonds and derivative instruments.This is commendable because the trading income is the most volatile income source for a bank. It also carries relatively high market risk, as well as not inconsiderable credit risk. It’s trading income hit N80.25b from N59.74b .

Consequently, its total operating income hit N465.86b compared to the N262.46b while operating expenses rose to N183.55b from N123.05b leading to a decline in its operating profit margin to .71.6% in 2024 compared to 78.9% in 2023 .The bank also witnessed a decline in its pretax profit margin to 34% from 38.9 just as its Net profit margin backtacked to 28% from 32.8% between the same period

The fourth constituency adequately satisfied by Stanbic is the regulatory authorities with its capability to ensure no excessive risks were taken as it operated prudently and within stipulated regulatory requirements .The Group continued to maintain an adequate level of capital during the quarter. The Group’s total capital adequacy ratio closed at 15.7% (Bank:13.5%) which is higher than the 11%minimum regulatory requirementThe Group also maintained a strong and diversified funding base during the reporting period. The Group’s liquidity ratio closed at 51.15%, above the 30% regulatory minimum requirement while its non-performing loan to total loan ratio of 3.19% (December 2023: 2.35%).

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Access Holdings:Success in acquisition, struggle with shareholder value

Access Bank

In 2002, when a young Aig-Imoukhuede and Herbert Wigwe bought into Access Bank, their mission was clear: to take the bank from position 80 out of 90 to one of the top ten banks in Nigeria within five years.

They achieved this with relative ease, and it took them just three years.

More than two decades later, Access Bank has grown into Access Holdings (Accesscorp), a holding company that spans banking, asset management, insurance, and fintech catapulting into first position as Nigeria’s largest bank by total assets.

Access Holdings has since blown past competing with Nigerian banks and has now set its sights on the continent. This time, they want to be among the top 5 banks in Africa (the bank was not clear by what measure).

In its recent facts behind the figure’s presentation for its planned N350 billion rights issue held at the NGX, the bank’s managing director and chief executive Roosevelt Ogbonna boisterously stated that the bank is not only the largest lender in the country by total assets, loans and advances, and deposits, but is also the ‘fastest growing bank’ on the continent.

He goes on to state that the bank is first in many other aspects except, of course, where it matters most to shareholders: market valuation, the ultimate measure of performance for any quoted company.

Access Holdings is currently valued at N689 billion ($430.9 million) the least valued of the top-tier banks in Nigeria. Its main rivals, Zenith Bank and GTCO are currently valued at N1.1 trillion and N1.3 billion respectively. FBNH and UBA are also highly valued at N791 billion and N781 billion respectively.

Access Holdings also ranks last when it comes to the price-to-earnings (P/E) multiple, which indicates a low valuation the closer the number is to one or below one. Access Corp currently trades at just 1x, compared to its peers, who trade at multiples of 2x or higher.

Additionally, it trails in terms of the price-to-book (P/B) ratio, being valued at a 70% plus discount to book value. This issue becomes even more pertinent, as the bank approaches investors for a capital raise.

This low valuation despite the bank’s growth and profitability raises several questions about investor sentiment and market perception. While Access Holdings has expanded its assets and footprint across Africa, these achievements have not translated into higher market valuation.

This is a conundrum that shareholders of Access Holdings continue to deal with. Why are investors assigning a much lower valuation to Access Holdings when compared to its peers? The disparity is perplexing given the bank’s impressive growth trajectory and operational achievements.

The answer may lie in a combination of factors including high debt levels, relatively lower dividend payouts, and perhaps lingering concerns over the sustainability of its aggressive expansion strategy.

Access Bank founders always had an ambition of taking the bank to the number one position in terms of total assets.

This means the focus would always be on organic and inorganic growth, requiring that it acquire just about any financial institution that fits its growth plans.

Proponents of aggressive growth often suggest the tradeoff for lower profits lies in a brighter future, which is why they often have high valuation multiples.

However, this is not the case for Access Corporation. It has continued to deliver profits every year, but then its valuation has remained subdued in most parameters, especially when compared to its peers.

Whilst not the best in terms of fundamentals, it is still up there as one of the best-performing banks in the country in terms of profitability growth. Perhaps where it may be lagging is in dividend payouts. Access Bank averages a paltry 23% in average (5 years) dividend payout ratio (per Nairalytics data), one of the least when compared to its tier-one peers.

The bank knows this well and tried to address it in its facts behind the presentation of the figures where Roosevelt claimed other banks that “pay big dividends have zero positive NPV projects,” alluding that its inability to compete in the area of dividends is because it has been investing in projects of the future that will deliver dividends.

In the same presentation, the bank stated they were now in the consolidation stage of their growth plan, suggesting the era of mergers may be coming to a slow end. It appears the bank has realized valuation still matters to shareholders despite its aggressive growth strategy.

Another plausible reason why the bank is likely undervalued could be its low shareholder yield, which indicates whether a company is returning enough value to its shareholders.

It is the combination of cash dividends paid, share buybacks, and debt repayments as a ratio of a company’s market valuation. While Access Bank ranks high in terms of dividend yield, it ranks low in terms of shareholder yield largely because of its large debt accumulation.

Access Holdings is the most leveraged financial institution in Nigeria with over N3.1 trillion in debt securities and interest-bearing debts compared to a net asset of N2.46 trillion. Thus, while it has expanded rapidly in assets, most of its acquisitions have been funded by debt, which will come at a cost to shareholder return.

Most of the debt has funded the bank’s expansion and investment strategy over the years, providing it with ample economies of scale to compete not just as a local bank but as a pan-African behemoth. However, this means little to shareholders if it does not translate into value through improved dividends and share price appreciation.

Unsurprisingly, Access Holdings is nowhere near the top 20 financial institutions in Africa in terms of market capitalization. Achieving that status requires more than aggressive acquisitions and balance sheet expansion; it demands a clear strategy for enhancing shareholder value.

As Access Holdings proceeds on its massive rights issue, the jury will be out on the management’s ability to deliver returns to shareholders in terms of share price valuation and superior returns.

Zenith’s race for the top

Kirk Leigh

In the last five years, the Nigerian Bankosphere has been on a roller coaster ride,ala a race to the top. The prize? The biggest and the most profitable bank in Nigeria. In 2008, on the back of a hefty assets base and springing profits, Zenith Bank appears to have clinched it.

Total assets in the Jim Ovia led bank zoomed to the trillion naira mark in the fifteen months since it almost got there in 2007. By September 2008, total assets read N1.79 trillion, up from N973 billion.

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.

In the period earning assets climbed 88 percent to N1.65 trillion from N878.8 million, confirming that indeed the rise in total assets could be due, in part, to a better hold of the job of maturity transformation.

Much of this is seen in how the bank more than doubled interest income to N142.39 billion from N63.62 billion. This is even as interest expense was hot in chase at an even faster pace to N53.59 billion from N19 billion. The rather exuberant pace couldn’t do damage because of its Lilliputian stance against the leviathan of interest income.

It was a period the bank held steady what it earns from assets and what it pays for them. The bank’s yield on assets was a respectful 8.6 percent while its cost of funds was 3.2 percent, earning it a spread of 5.4 percent.

This is only a small improvement over the last financial year when spread was 5 percent; it simply shows recourse to steady growth. Last year, yield was 7.2 percent while cost of funds was 2.2 percent.

The seemingly insignificant addition to spreadresulted in a whopping 120 percent rise in gross earnings to N208.29 billion from N94.88 billion. This is visible indication of the efficiency in the bank’s investment though the less obvious indication, unless you are in this field of analysis, is the Bank’s Net Interest Margin which rose from 5 percent to 5.3 percent.

At the centre of the gains in this play at interest rates is the bank’s loan portfolio and deposit level. Upping its game in this terrain, the bank shelled out N445.84 billion in loans and advances, raising the figure 57 percent from N288.11 billion. This comes across as a little conservative for a bank that has scooped over a trillion bucks from depositors. Deposits were 87 percent more at N1.186 trillion, up from N634.49 billion.

The cautious lending is even more pronounced as it is observed that the bank gave out only N38 from every naira got from depositors. It gave out N45 previously.

Perhaps the bank is wary at the burgeoning level of bad and doubt debt expenses plus the level of debts gone awry.

Bad loans had doubled in the period to N9.56 billion from N4 billion and bad loans expenses had not only traced that inglorious path but hadled it, running four times as fast. It climbed 245 percent from N1.83 billion to N6.3 billion.

On the bank’s seeming foot dragging on lending, Analysts at Financial Market Intelligence, FMI, surmise that if the bank can lend that cautiously and earn as much as 5 percent spread, then its shareholders have reason to be optimistic that they are getting their monies worth. It marks efficient lending and the bank has won in the game of interest rates.

But as much as N65.9 billion was made from fees and commissions and other sundry items by the bank. And this is two times better than last year’s N31.255 billion.The rising figure indicates that the bank is mindful of the deleterious effects of rising interest rates and how it can wipe out whole investments, especially in a global crisis such as we are now.

Having had a strong showing in earnings, piling costs do not seem to be having unbearably depressing effects on profits. In fact it revealed how much of a balancing act the bank achieved between earnings and expenditure in the period.

Pretax profits doubled at N56.12 billion from N25.68 billion. Thisas operating expenses spiked at 91 percent to N92.25 billion from N48.33 billion.With this result the bank could hold steady, its pre-tax margin at 27 percent. Meaning, as was last year, the bank spent only N27 from every naira it got from earnings on operations.

Paying less tax, the bank raised net profit almost three times to shore at N51.99 billion from N18.78 billion with the effect of raising net profit margin to 26 percent from 20 percent. This 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.

It is little wonder then that shareholders were willing to double their stake in the bank to N8.37 billion from N4.63 billion.Their bets on the bank as seen shareholders’ funds quadruple, rising to N344.35 billion from N114.59 billion.

The bank is investing less this year indicating that next years spread may not be too different from this year’s but depending on the swing in interest rates; it may yet earn more in gross income for the bank.

But the bank’s CEO Jim Ovia expects a ‘stable economic environment’ and so is confident about the future. By that he means he intends to stay on top- at the Zenith.

Zenith’s glide on the good waves

Nigeria’s economy looked to be on the ascendancy in the last fiscal year, creating a leeway for corporations to head north in their financial performance. Zenith Bank, Nigeria’s biggest bank by capitalisation, just rode the waves.

The economy took firm strides forward as suggested by leading indicators; Gross Domestic Product (GDP) grew to 7.67 percent from 6.58 percent on the back of a steep return by frontier and emerging markets. In fact, Nigeria emerged among the best performing frontier market with improved ratings by the trio of S&P, Fitch and Moody’s.

The capital market reflected the economy’s expansion by creating more wealth to the tune of N13.23 trillion, which is 47.2 percent better than the N8.97 trillion achieved in 2012. Zenith Bank had a fair share in creating that wealth as the bank’s capitalisation swung to N860 billion from N612 billion.

The bank grossed N351.47 billion in earnings the year under review, chalking a 14.5 percent gain from the N307 billion achieved a year earlier.

Zenith is able to navigate the banking terrain to get the results, the Bank’s chairman says, because it was ‘able to exploit the opportunities within the environment’.

The ‘environment’ was fraught with plenty of hick ups in the last financial year as banks were asked to divest from subsidiaries and stash as much as 70 percent of their public sector reserve with the Central Bank of Nigeria (CBN).

Despite the limiting conditions of operations, the bank was able to expand growth levels from the year before.

The growth was by no means seismic but enough to rank among one of the most best performing in the industry. Pre-tax profits grew by 8.3 percent to N110.6 billion from N102 billion. This translates to earning 31 kobo from every naira after operating costs are considered. The amount is less than the 33 kobo earned in 2012.

It is indicative that the bank may have to rein- in operations costs although this was to be expected as the bank scales operations.

The question becomes: are we likely to see unwieldy cost of operations in the years to come? This question is apposite considering that it h as a direct impact on the bank’s bottom line. Indeed it affected the bank’s bottom line.

The cascade of operating margins hit net profit, which slumped 5 percent to N95.3 billion from N100.6 billion. This had the effect of stunting net profit margin, bringing it back from 33 percent to 27 percent.

Adjusting for inflation, the Zenith net profit shed some weight from 24.6 percent to 18.4 percent. Inflation was 8.6 and 8.4 percent in the respective years.

Despite shrinking margins, the bank offered N54.94 billion in dividends to shareholders leaving the residual as retained earnings. Dividend per share came to N1.75 kobo per share compared to N1.60 per share.

While the over 50 percent dividend pay-out establishes the Bank’s reputation as a good dividend paying stock and therefore recommended to investors who want to go for the long haul, yet it calls to question its interest in growing the bank’s capabilities in the short term- and can have a deleterious effect on the bank’s internal rate of return (IRR) as far as the theory of finance say.

The marketing machine of the bank, it would seem is working overtime, growing deposits; that section of the bank’s balance sheet swung up 18 percent from N1.93 trillion to N2.27 trillion.

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 N1.25 trillion, 26.4 percent more than the previous year when N989.8 billion 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 and credit risk also took a spring.

Interest and similar income grew by 17.5 percent from N221.3 billion to N260 billion but credit risk as read from the loan to deposit ratio rose 55 percent from 51 percent.

The bank could take such a risk bristling from the confidence of a healthy balance sheet; after all its assets and shareholder funds can cover for any slips.

The Bank assets which grew 20.7 percent from N2.6 trillion to N3.14 trillion, is 1.4 times the deposits level. It was 1.3 times bigger the year before.

Shareholder funds grew 10 percent from N462.96 billion to N509.25 billion to grow 4.5 times more than deposits, better than before, when it was 4.2 times.

But what does the new financial year hold for Nigeria’s biggest bank by assets?

The first quarter results for 2014 provides a glimpse of better showing as Gross Earnings take s–off with a 8.4 percent growth to N94.32 billion compared to N86.9 billion made in the equivalent quarter.

The better performance suggests that the year would be more robust and could have been better were it not for the state of inertia the economy experienced from the late passage of the Federal budget.

For an economy that depends mostly on the activity of the government, public sector funds are crucial to oiling of the sectors including banking.

Still in the first quarter, net interest income, which measures how well a bank utilises its income earning assets had a less than percent slack over the previous quarter but still manages to help improve pre tax and after tax profits.

Pre-tax profits grew less than one percent but after tax profit improved one percent. We note that pre-tax profit in the 2013 full year was in the negative regions, so a quarter of one percent rise in that metric indicates that the bank would do better this year in terms of managing operating costs. Indeed there were suggestions to this effect in the quarterly performance as operating profit hit a 6 percent improvement from N62.8 to N66.5 billion. How Zenith Bank Expands Profit From Slow Earnings

Zenith Bank, Nigeria’s biggest bank by profitability, had gross earnings slowing in the first quarter of 2019 but wrenched up bottom line with a deft application of management’s experience beginning from leveraging net interest income.

By hauling up net interest income by almost a quarter to N86.14 billion from N69.99 billion, 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 6.5 percent to N158.11 billion from N169.2 billion, a potential spoiler. But after suppressing interest expenses by 22.2 percent to N36.34 billion from N46.72 billion while at the same time guiding the growth of interest income by 5 percent to N122.5 billion from N116.7 billion, net interest income, which is a guide to how well a bank manages the interest rates it pays for borrowing and lending, jumped many paces to give a positive outlook to pre-tax profit.

Pre-tax profit of the leading bank, buoyed by 6 percent in the period to to N57.29 billion from N54 billion. This helped to shoot up pre-tax profit margin to 36.2 percent, up from 32 percent. with that rise in pre-tax profit, the bank’s net profit flew 6.7 percent to N50.23 billion from N47 billion in the period, leading to a rise in net profit margin to 31.7 percent from 27.8 percent.

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. In that year, the bank’s profit before tax (PBT) was N232 billion, up 16 per cent from N199 billion in 2017; while profit after tax (PAT) was N193 billion in 2018, up 11 per cent from N174 billion in 2017, in a somewhat fragile economy that is recovering from recession.

To cement its place as the most profitable bank, return on equity (ROE), and return on assets (ROA), improved to 23.8 per cent and 3.3 per cent in 2018 from 22.9 per cent and 3.4 per cent respectively in 2017. This is as gross earnings dropped by 15.4 per cent, from N745 billion in 2017 to N630 billion as at end 2018.

Similarly, the bank’s total assets grew by 6 per cent, from N5.60 trillion in the preceding year to N5.96 trillion in 2018; while shareholders’ fund grew marginally by 0.5 per cent, from N812 billion in 2017 to N815 billion in 2018. For such weighty shareholders’ fund, it is natural to pull in heft deposits as total deposits grew 7.3 percent to N3.69 trillion from N3.44 trillion.

But it was the bank’s ability to meet and surpass regulatory guidlines that was the highlight of the full year results. Interest expenses were managed down by reduced by 33.3 per cent, as the bank’s stock of low-cost deposits increased, with interest paid on time deposits declining the most by 61.1 per cent. Also, the cost of risk dropped to 0.9 per cent as against 4.3 per cent in 2017 while loan loss expenses moderated by 81.3 per cent.

The bank’s balance sheet was robust as the loan to deposit ratio, liquidity

FINBANK: a fresh new start?

Kirk Leigh

In this environment, banks face a skeptical if cynical public. Rightly so; what with the proclivity for the interest mongers to duck festering positions behind sprucedup figures. Not so for Finbank; it is cutting a new image for itself. This is as it, grapples with the challenge of competing in a harsh environment.

The bank is at work, sleeves rolled-up, digging a trench for bad and delinquent loans and entrenching good governance with full disclosure and this has affected bottom line. It is the sinecure for a stronger balance sheet in the coming year management insists.

This year, Gross earnings trudged 38 percent from N27.5 billion to N37.9 billion on the strength of its 180 branches spread across the country. The modest paced growth seems to fit the average rise in fixed assets but raises questions against a steep climb of earning assets.

Fixed assets, which may be associated with number of branches among other assets,was almost steady at42.7 percent from N4.99 billion to N8.5 billion while earning assets tripled to N324 billion from N112.6 billion. If anything, a racy earning assets figure should result in more robust earnings except may be spreads or the difference between interests earned and interests paid are not quite attractive. It could also be because commissions from non interest dependent transactions are dropping.

But these two indicators are on the rise at Finbank. Interest earnings bettered last year’s by 70 percent at N26.17 billion from N14.75 billion despite an equally leggy interest expense figure of N11.9 billion or a 66 percent jump from the former N7.16 billion.

The interplay between interests paid and those received ushered net income of N14.3 billion, an 88 percent growth from N7.6 billion.

But how successful are the investment decisions of Finbank relative to last year’s? The bank looked better last year in returns to investment than this year. Net Interest Margin in the current year is 4.4 percent. It was 6.8 percent last year. In absolute terms, investment income fell from N91.5 million to N15.63 million.

This has implications for Gross returns in the coming year especially as the bank has pumped more money into investment, putting in as much as N8.7 billion compared to the N3 billion of the year before.

Analysts say the low return on investment is systemic or an economy wide phenomenon and is as a result of the general lull occasioned by the worldwide recession and is not likely  to have an adverse affect on the bank going forward as the recession is expected to taper off by the bank’s next financial year.

Since only a scanty trace for much of the lethargy can be put at the door step of the bank’s earning assets, the next natural candidate is what the bank makes from commission.

Are commissions getting clobbered? Yes! Commissions and other incomes backtracked 9.8 percent from N13.1 billion to N11.82 billion. Much of the drop here is traced to reduced takes from the forex market and investment income.

Analysts from Financial Market Intelligence, reveal that it may be worth the while of the bank to rev up this item of its balance sheet, stressing that it holds the key to stabilizing earnings especially at a time that the world is in recession and interest rates volatility is a factor in Nigeria.

The bank’s slower moving gross returns with hefty provisioning for past profligacy coalesce into big drops in profits in the period.

Pre tax profits fell 52 percent from N3.33 billion to N1.6 billion. This uninspiring run suppressed pre-tax margin significantly to 0.04 kobo per naira where it once did 0.12 kobo.

This means that for every naira the bank earns from a combination of interest assets, fees and commissions, before paying the tax man, he makes only three kobo.

Pre-tax margins are an indicator pointing to how well a company manages its financial resources.

For Finbank, it becomes clear that this position only represents making up for past mishaps; bad loans make up 23 percent of the bank’s portfolio. The position, though, seems poised to improve since the bank gave out only 18 kobo of every naira of deposit as loans this time around. Last year it gave out 22 kobo.

Even so, the bank grew its loan portfolio by 112 percent from N28.47 billion to N60.33 billion.This is congruent with a faster growing deposit base at 114 percent to N320 billion from N130 billion.

The decline in pre-tax margin represents a commitment to a fresh start towards a more competitive position. Analysts ague that once the provisions peter out, every naira earned would contribute towards gain for the bank.

But net profit margin was also down to 0.03 kobo where it had made 10 kobo previously; this represents negative real earnings in an economy high on inflation such as ours.

This took a toll on reserves even as the bank went to the market to shore up its shareholder funds in an offer that was said to have raked in ‘over N100 billion.

If indeed that much was raised them the bank would have positioned itself, at last, for big ticket transactions.

Alluding to this positioning, Okey Nwosu, the bank’s CEO says, ‘in order to achieve superior results in the coming year, the bank is beign re-engineered towards achieving its strategic goals’.   According tro him, ‘Over the past months, appropriate initiatives and projects required to refocus and transform our position have been implemented and others in various stages of completion’.

Among the initiatives, the MD says is to put in place a ‘robust service management framework and that of enhanced risk management.