Zenith Bank 9M 2023 Result: Non-interest Income Tripled as Top-line Earnings Grew 114%

Zenith Bank is in a pickle; should it evolve into a Holding Company (Holdco) structure to catch up with market rivals or defy the increasingly popular model adopted by other Tier 1 banking counterparts and draw a line in the sand? Different schools of thought have expressed divergent views. One persuasive school believes the bank has no clear benefit from going into a Holdco arrangement. The advocates of this school insist that the bank’s pioneer managing director (MD), Jim Ovia, has since left day-to-day management to competent personnel and, unlike other banks, Ovia did not need to transmute from being a bank MD to a Group MD. He had since left the nest.

Indeed, this school fails to see any operational benefits in changing the bank’s present structure. The lender’s strong quarterly results and commanding brand equity suggest that Zenith Bank need not fix what is not broken. 

The present model enables the bank to compete favourably with its Holdco rivals and reduces unnecessary lards of operational fat. According to this school, Zenith Bank needs no financial Keto or Vegan diet to become trimmer, nor does the lender need high-calorie supplements by way of additional businesses to become fatter.

However, a second school of thought that is partial to a Holdco structure argues that a Holdco arrangement would build flexibility into the lender’s operations and create a larger customer value proposition. For example, a Holdco would have two principal business lines: one of trading and the other of lending. The trading would support customers’ desire to acquire or sell alternative assets like equities, ETFs, REITs, and bonds. This side of the business would be fee-driven. The lending side of the business would be interest-driven. Scaling the fee-driven side of the business would reduce the interest rate risk associated with the Holdco activities. In addition, financial institutions have seen the off-balance sheet side of their businesses grow geometrically as the lending or on-balance sheet side of operations grows arithmetically. Indeed, more recently, private lending through Private Equity institutions, through what has been called leveraged lending, competes with more traditional lending by banks.  

As Zenith Bank sorts out its future structure, it saw gross earnings improvement mainly from interest and non-interest income at 52% and 48% contribution, reflecting a better income structure than the previous distribution dominated by interest income. The N607.16bn non-interest income came predominately from revaluation gains and trading income at a contribution of 66% and 21%, respectively, which have raised the question of sustenance, considering both factors are due to favourable conditions that might not be repeated in subsequent quarters. However, the CBN has signalled monetary tightening to curb rising inflation, reaffirming higher future lending rates to grow bank income. However, naira volatility would introduce FX risks that must be managed.   

The deposit money bank’s (DMB’s) cost-to-income ratio (CIR) fell to 37.80% from 55.80% in 9M 2022, while its non-performing loan ratio (NPLR) dropped to 3.80% despite a higher cost of risk of 5.5% (1.3% in 9M 2022), Zenith’s return on equity (ROE) rose to 35.10% from 18% in 9M 2022 and its return on assets (ROA) floated to 3.8% (2.2% in 9M 2022). The group’s price-to-earnings (P/E) ratio rose to 2.28x from 0.25x in the contemporary period of 2022, indicating that investors have higher expectations of the lender’s future earnings growth.

Zenith’s financial position improved in 9M 2023 despite the riskier environment and a difficult Q1 2023. The group’s customer deposit base rose by +66.42% to N13.38trn, supporting a +48.99% loan growth to N5.78trn in 9M 2023. Additionally, the bank’s investment securities grew by +22.57% to N2.29trn, driving the growth in non-interest income in 9M 2023. The digital arm of the bank generated N33.55bn, a decline from N36.07bn in 9M 2022. The decline was understandable as the lender’s mobile app and internet banking had challenges in Q1 2023. 

Key Highlights in 9M 2023

• Zenith’s gross earnings increased by +114% to N1,329.08bn in 9M 2023 from N620.57bn in 9M 2022.
• The group’s Profit before tax soared by +149% to N505.04bn in 9M 2023 from N202.55bn in 9M 2022. 
• Customer deposits increased by +66% to N13.38trn in 9M 2023 from N8.04trn in 9M 2022.
• Loan advances rose by +49% to N5.78trn in 9M 2023 from N3.88trn in 9M 2022.
• Zenith Bank’s total assets grew by +60% to N18.16trn in 9M 2023 from N11.34n in 9M 2022.
• Net interest income rose by +47% to N607.16bn in 9M 2023 despite +186% growth in interest expense over +72% interest income’s growth.  
• Personnel expenses increased by +44% to N88.43bn in 9M 2023, and other operating expenses grew +15% to N197.48bn in 9M 2022. 
• Earnings per share (EPS) rose to N13.82k in 9M 2023 from N5.55k in 9M 2022. 
• Retained earnings increased by +40% to N893.90bn in 9M 2023 from N638.22bn in 9M 2022. 
• Income tax expense spiked by +151% to N70.86bn in 9M 2023 from N28.22bn in 9M 2022.
• Net Fees and Commissions declined by -21% to N79.34bn, and E-banking income dropped by -7% to N33.55bn in 9M 2023. 
• Zenith Bank’s Non-interest income rose by +186% from N211.97bn in 9M 2022 to N607.16bn in 9M 2023.
• Revaluation gains leapt by +3294% from N11.14bn in 9M 2022 to N378.12bn in 9M 2023. 

Key Highlights in Q3 2023

• Net interest income increased by +56% to N153.37bn in Q3 2023 from N98.16bn in Q3 2022 as interest income rose by +71% to N255.51bn over N102.14bn interest expense.
• Profit before tax increased by +113% to N154.68bn in Q3 2023 from N72.55bn in Q3 2022 and post-tax profit advanced by +126% to N142.44bn in Q3 2023
• Other Operating Expenses grew by +3% to N49.47bn in Q3 2023 and personnel expenses rose by +48% to N32.18bn in Q3 2023.
• Impairment charge fell by -83% to N2.07bn in Q3 2023 from N11.98bn in Q3 2022.
• Net fees and commission income slightly declined to N35.42bn in Q3 2023 from N35.61bn in Q3 2022.
• Income tax expense increased by +27% to N12.24bn in Q3 2023 from N9.63bn in Q3 2022.

Gross earnings 

The high-interest rate environment and substantial revaluation gain brought the group’s gross earnings to N1.33 trillion in 9M 2023 from N620.57 billion in 9M 2022. The N708bn or 114% growth came from non-interest and interest income with 46% and 50% contributions, respectively. The group’s strategic investment in securities contributed 39% of the interest income as government bonds earned N108.51bn, treasury bills N91.44bn, commercial papers N14.36bn, and placement with banks & discount houses had N45.79bn, while loan and advances contributed 61% of the interest income. The non-interest income came from revaluation gains of N378.12bn, while fees & commissions income and trading gains contributed 13%, 4%, and 21% at N79.34bn and N127.38bn, respectively. Analysts note that the +114% rise in earnings was the highest in the last 5 years, and sustainability in subsequent quarters depends on a repetition of the favourable investment environment and naira depreciation (see chart 1 below). 

Profitability 

The group retained a third of gross earnings as profit in 9M 2023. The group’s profit before tax grew by +149% to N505.04bn and N434.17bn in 9M 2023 from N202.55bn and N174.33bn in 9M 2022 respectively. In the past five years, the group’s profit had grown by an average of 5%, suggesting the absence of large revaluation gains that fatten income. However, the Asset Management Company of Nigeria’s (AMCON’s) levy remained the highest cost item for the group at N57.38bn.  The group’s income tax expense rose by +151% to N70.86bn in 9M 2023 from N28.22bn in 9M 2022 (see chart 2 below).

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Asset Quality 

Zenith Bank provisions for doubtful loans spiked in 9M 2023 as harsh economic conditions threatened loan quality and asset value. The impairment charge rose by +466% to N210.00bn in 9M 2023 from N37.10bn in 9M 2022, driven by loans and advances, investment securities, and treasury bill provisions, which grew by +446%, +179%, and +4919%, respectively. However, the group’s non-performing loan ratio improved to 3.80% in 9M 2023, the lowest in 5 years. While the low NPL suggests improved loan quality, the fragile macroeconomic environment will continue to threaten asset quality; hence, impairment charges may continue to rise (see Chart 3 below).

Chart 3:

Financial Position

In 9M 2023, Zenith Bank’s total assets grew to N18.16 trillion from N11.34 trillion in 9M 2022, driven by +46% growth in treasury bills, +49% growth in loan & advances, +42% rise in investment securities and +68% rise in Cash and bank balances with CBN. The total assets distribution slightly changed, with loans & advances at 32%, investment securities at 13%, cash & balances with CBN at 17% and treasury bills at 16% compared to the distribution of loans & advances at 34%, investment securities at 17%, cash balances with CBN 14% and 17% respectively in 9M 2022. The loans & advances and investment securities dominating the group’s assets will positively ensure interest income inflow, while the upward rise in Cash and bank balances with CBN will reduce funds available for lending. The growth in loans and advances came from term loans and overdrafts, which increased by +64% and +62%, respectively, as on-lending facilities declined by -9% during the period. The deposits portfolio was driven by demand and savings deposits valued at N7.00trn and N4.62trn, respectively, while term deposits remain behind at N1.76trn. The high demand deposits and low term deposits will help reduce the group’s interest expense, and the +64.2% growth in savings deposits will feed interest expense. In accordance with the Apex Bank circular about the prudence of FCY revaluation gains, the group’s reserves improved by +89% to N754.08bn, and the stronger profitability aided +40% growth in retained earnings (see table 1 below). 

Table 1:

Loan-to-deposit Ratio (LDR)

Zenith Bank has struggled with achieving the 65% statutory loan-to-deposit ratio (LDR) in the past five years. The customers’ shrinking disposable incomes and business uncertainty have reduced loan disbursement, which has been made worse by a high statutory cash reserve ratio (CRR) of 32.5%. The LDR fell to 49.40% in 9M 2023, the lowest in 5 years, as against 63.30% in 9M 2020. Zenith Bank’s loans and advances grew by 49% to N5.78bn in 9M 2023 from N3.88bn in 9M 2022, representing one-third of customers’ deposits at N13.38bn as of 9M 2023. Analysts expect the group to be deliberate on raising loans and advances in coming quarters to increase interest income (see chart 5 below). 

Chart 5:

Efficiency 

Rising earnings improved the group’s financial efficiency in 9M 2023, with its cost-to-income ratio (CIR) sliding to 37.80% from 55.80% in 9M 2022. Most banks have struggled with a high inflationary environment, Zenith Bank has seen its CIR hover above 50% over the last five years (see chart 6 below). 

Chart 6:

Zenith Bank Share Price Movement 

Zenith Bank’s share price was bullish from May 2023, after an initial downward fluctuation in the first four months of 2023. The share price started at N24.00k on January 04, 2023, and fluctuated several times to a new support price of N21.80 on April 20, 2023, just before recovery by early May 2023. The share price rose steadily to a record high of N37.10k on September 06, 2023, but slumped, sliding back to N31.45k on September 30, 2023. The share price pulled out of the dip in October, swinging to settle at N34.90k on December 5, 2023. Despite its share price volatility in Q3 and Q4, the financial lender generated a year-to-date (YTD) return of 45%, ahead of the country’s inflation rate of 28.20% as of November 2023. The bank joined the league of companies advertising a N1trn market capitalization as of June 2023 (see chart 7 below).

Chart 7:

Competitor Analysis: A Game of Grit 

Tier 1 banks’ strategic foreign asset holdings made them major beneficiaries of the exchange rate reforms, boosting performance in 9M 2023 despite the fragile business environment. The gross earnings for tier 1 banks spiral, with Access Corp, Zenith and UBA earning above N1trn at N1,593.74bn, N1,329.08bn, and N1,308.86bn, respectively, while FBNH and GTCO settled closely at the N1trn mark at N985.58bn and N841.50bn accordingly. The gross earnings growth came from large revaluation gains and interest income earned through investment securities, loans, and advances. The robust earnings could cushion the high operating expenses triggered by the inflationary environment, aiding profitability upward adjustment. The profitability ladder somewhat differs from the gross earnings, with Access Corp receding to the fourth position as Zenith Bank led at N505.04bn, followed by UBA at N502.09bn, GTCO at N433.20bn and FBNH at the lowest at N270.33bn. This suggests Access Corp incurred higher costs, eroding a significant percentage of the earnings compared to Zenith and UBA in 9M 2023. Ranking the banks based on digital income showed that UBA earned the highest at N75.75bn, followed by Access Corp at N70.35bn, FBNH came third at N48.79bn, Zenith Bank settled at the fourth position with N33.55bn, and GTCO had the lowest at N30.91bn. The digital income is less than 5% of the five banks’ gross earnings, suggesting a need for further technology deepening to compete effectively with FinTech’s.

The banks’ efficiency improved in 9M 2023, leveraging the windfall earnings. The cost-to-income ratios moderated across the banks, with GTCO being the most efficient at 25.76%, followed by UBA at 36.44%, Zenith Bank came third at 37.80%, and Access Corp had the highest at 55.53%. This is a significant improvement, showing banks can conveniently cover their costs and have better profits to boost future projects, unlike the previous year, when CIR averaged 60% for tier 1 banks. 

Regarding return on equity (ROE), UBA had the highest at 44.37%, followed by Zenith Bank at 35.01%, GTCO at 28.86%, FBNH at 26.60%, and Access at 15.27%. The improvement in gross earnings supported the upward adjustment (see Dashboard 1 below).

Dashboard 1:

Analysts Thoughts-Monetising Uncertainty 

With recapitalisation a top priority for lenders in 2024, the optimal business model to draw out the highest economic value would require addressing the operating structure of the lender.  

Zenith Bank’s numbers in 9M 2023 have shown corporate stamina and an ability to withstand economic headwinds. The banking group’s gross earnings, profitability, and balance sheet placed it ahead of some tier 1 banking rivals. However, with falling customer real disposable incomes and slow economic growth (GDP growth was 2.54% in Q3 2023), loan repayment difficulties may emerge, and loan quality could decline, potentially hurting future operating performance. 

In the main, Zenith Bank has future risk asset quality concerns but not sufficient to put a cloud over what has been a sterling performance so far.