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ZENITH BANK PLC : A CLEAR PROFIT AND MARKET LEADER

Under Ebenezer Onyeagwu Zenith Bank is not only leading in market by value and profitability , currently, it is the most capitalized bank in Nigeria with N1.187 trillion

In the last few years, the Nigerian Bankosphere has been on a roller coaster ride, ala a race to the top. The prize? The most valuable  and the most profitable bank in Nigeria. In 2021 , on the back of a hefty market capitalization and springing profits, Zenith Bank appears to have clinched it.

Zenith Bank has finally changed leadership equations of the Nigerian banking industry .Before these milestones were registered ,GTBank consistently was the most valuable while Zenith Bank was with  the most profitable tag . But Zenith Bank is not only leading in market by value and profitability , currently, it is the most capitalized bank in Nigeria with N1.187 trillion while GTBank ,its closest rival ,  has N 843 billion in paid-up capital leaving the total asset laurel to Access Bank Plc . On the Nigerian Stock Exchange, only five companies have posted more capital than Zenith Bank. The Zenith Bank’s leadership in the stock market is inspired by the persistent impressive performance of the bank, driven by superior service and brand quality, unique customer experience, and sound financial indices

PROFIT LEADERSHIP

Banking sector is highly competitive particularly with the current deleterious and challenging macroeconomic environment . Despite the challenges in the first nine months of the year 2021, Zenith Bank still retains its profit leadership  .  This feat was achieved  at  its cost to income ratio  of  54.9%. ,Return on average equity (ROAE)18.6%  and  its Return on average assets (ROAA) 2.5% ; practically all other performance metrics looked up .Based on these impressive ratios , Zenith Bank Group delivered a Profit before Tax (PBT) of NGN180 billion for the nine months period ended September 30, 2021, reflecting a 1% growth over NGN177 billion in the prior year   ; its Profit after tax was N 161 billion, the biggest in the industry in the third quarter ,2021

With the present outlook ,the remaining part of the year the bank’s performance is a harbinger of a juicier outing in the 2021 financial year; management’s outlook remains positive buoyed by a declining inflationary trend, expected increase in foreign exchange inflows, and improving oil production. The Group remains focused on increasing its retail market share, consolidating its leadership position in the corporate segment and maintaining a robust balance sheet” 

ZENITH  BECOMES THE MOST VALUABLE BANK,OVERTAKES GTB

Zenith Bank has led the list as the most valuable bank among the banks listed in the Nigerian Stock market with a market value of N789.6 billion to overtake GTB N765.2 billion as of the end of 2021. This is in spite the downturn that hit the NGX banking index which recorded only a 3.32% gain in 2021 compared to the 10.14% growth recorded in the previous year.

The above feat was occasioned by rising investors’ confidence in the bank, which also saw the price of the bank’s share gaining one per cent to close 2021 at N25.15 in 2021. Zenith Bank overtook GT Holdings on the list of commercial banks with the highest market capitalization despite only growing marginally by 1.4%.

 A 19.6% decline in the share price of GTCo ensured that Zenith Bank occupied the position. Zenith Bank’s market capitalization rose past N800 billion on this January ,2022 while GT Co slipped to N749 billion. However , one fact that equally contributed to this is that Zenith Bank has more shares on issue ; this will always make it more valuable than GT at a similar price.

Zenith Bank first overtook GT Bank in terms of market valuation on November 19, 2021, when GTCo’s market cap fell to N747.5 billion compared to Zenith’s N753.5 billion. Since then, Zenith has risen past N800 billion while GT CO’s slide continues.

At its peak on January 19, 2018, GTB was trading at N54 per share or a market capitalization of N1.5 trillion. In the same period, Zenith Bank was trading at N33 per share valued at just over N1 trillion. During the Covid-19 bull ride of late 2020, GT Co shares recorded a resurgence after its share price rose to as high as N36 taking it to over N1 trillion. The bank has now lost over N250 billion in market value since November 2020. Data also reveal its price to book ratio is now firmly below 1 for the first time in years

WHAT DRIVES INVESTORS’ OPTIMISM AND HOW IT OVERTAKES GTB

BETTER  EPS FIGURE

A good way to determine earnings to the investor is the Earning Per Share (EPS), which is the monetary share value, i.e., what every share issued by the bank will receive from declared earnings. The higher the EPS, the more profitable the bank is. Full Year 2020  EPS for Zenith Bank comes to about 7.34 per share, as compared to 7.11 for GTBank. This means that investors holding shares of Zenith get 0.23k more. However since EPS refers to corporate value, it does not indicate cash value to the investors

BETTER DIVIDEND  YIELD

In terms of cash value to the investors or dividend yield for Zenith Bank is at 13.33% while GT Bank is at 9.68%. This means that investors in Zenith Bank get a higher cash yield per invested share. On the Nigerian Stock Exchange, only three stock have a higher Dividend Yield than Zenith Bank. Divided Yield is important because it brings in the market price of the bank stock and the cash dividends paid by the bank, this is most useful because it indicates the actual cash that flows back to the investor.

The dividend yield also allows investors to compare Zenith shares with other non-equity products like Treasury Bills and Commercial paper. If the yield on Fixed Income products is higher, then it is better you invest in Fixed Income because you get a higher yield at a lower price.

BETTER P.E RATIO

A final measure to consider is the Price to Earnings Ratio (P.E.) which is the Price of the stock divided by the earnings of the stock. P.E. is useful in determining how “cheap” or expensive a stock is. Based on market price, Zenith Bank is trading at N22.50 as of March 19th and GT Bank is trading at N31.00. It will be factually incorrect to simply say that Zenith is cheaper because the market price is cheaper, we have to look at the P.E. ratio.

Zenith Bank posts a lower P.E of 3, while GTBank posts a P.E. of 4.34. What this means is that with the current rates of earning in Zenith Bank, it will take just 3 years to match the market price of GTBank shares. In essence, Zenith Bank shares are cheaper.

In summary, assuming I had N100,000.00 to invest in January 2020. If I have bought Zenith and GTBank shares, I would have had more units of Zenith and earned more via a higher dividend yield. Zenith would also have posted a higher earnings value.

Overall, both banks are among volume and dividend payout leaders, not just in their sector but in the NSE as a whole and remain firm in my “Hold” column. Both stocks remain relatively cheap in terms of their valuation.In fact, Zenith still trades at a price to book ratio of 0.67x compared to GT Co’s 0.9x.

BEHIND THE BATTLE FOR PROFIT LEADERSHIP:

THE CRITICAL SUCCESS FACTORS

Furthermore , among the first tier banks , two other key and fundamental critical success factors that bestow a place for each of them as a first tier bank in the industry , are the total asset or balance sheet size and capital base ; these make such a player , both unassailable and highly formidable for the smaller players and giving them an edge over tier 2 and other categories in the industry . But both are merely critical success factors , not the core competencies that deliver the actual leadership or the bottom linesThe battle for leadership in the banking industry , no doubt , is both herculean and intensive as each player is dispensing similar and less differentiated products and services . All of them could lay claim to strong brand reputation, excellent service delivery as well as product range and innovation . Moreover , within the existing markets most of the rules of competition have already been established . Issues like  what price performance tradeoffs customers are willing to make ,which channels have proved most efficient, the ways in which products and services can be differentiated and the optimal degree of vertical integration ,among others are already settled . Sequel to this unique industry’s feature , to gain a disproportionate share of future profits, it is necessary to possess a disproportionate share of the requisite competencies which include the patient and persistent accumulation of intellectual capital  as well as the ability to actively shape the emergence of the  future industry structure to one’s own advantage.

Furthermore , among the first tier banks , two other key and fundamental critical success factors that bestow a place for each of them as a first tier bank in the industry , are the total asset or balance sheet size and capital base ; these make such a player , both unassailable and highly formidable for the smaller players and giving them an edge over tier 2 and other categories in the industry . But both are merely critical success factors , not the core competencies that deliver the actual leadership or the bottom lines

However, while all the above factors and values have been fairly settled , each player   ,no doubt , is  currently  battling for market share and market position with fairly well defined parameters of value ,price, cost and service. This last stage of competition is where Zenith Bank is having an edge .

.CORE COMPETENCIES AS KEY DETERMINANTS OF LEADERSHIP

.For this significance ,it has been a battle Royale among the top banks with one trying to outdo the other by looking beyond these critical  factors. Only core competencies or robust resources could give a player the necessary competitive advantage in a battle for market share and market position with fairly well defined parameters of value ,price, cost and service  . For Zenith Bank to lead others in the industry , it is more than both assets and capital as these are mere critical success factors. The determinants that delivers competitive advantage are ” core competencies ” or activities and processes or things that an organization uses to deploy its resources effectively which are very difficult for its competitors to emulate. This where their skills and competencies are put work and the bottom lines are delivered

CORE INCOME SEGMENT AS A HARD -NUT

A bank is best rated by its ability to lend safely and profitably , not only by the bank’s volume of assets or equity though they could enhance performance. But this is herculean for many banks . First , knowledge of fund transfer pricing , a method used by bankers to evaluate the profitability of deposits and loans, is germane for a sound performance in the core banking income segment . . The challenge, in the case of the deposit aspect of this is that when bankers evaluate the profitability of deposits, they know the cost or the interest to be paid on those deposits and the associated operating expenses, however determining the return is more problematic because deposits are used to finance various types of assets. . In fact, this is absolutely essential for accurate pricing of the bank’s commercial products as well as for performance evaluation and organizational strategy, to have a sound method of calculating the fund transfer price.

For loans, the problem is symmetrical. Bankers know the return on loans or the interest income but not its funding cost. The reason in this case is that banks use several sources of funds to finance assets . .Again, they need a specific fund transfer price to evaluate the cost of funding loans.

HOW THE BATTLE WAS FOUGHT AND WON IN THIRD QUARTER, 2021

Zenith Bank’s core competence in risk taking and management , the core business of banking that is inherent in maturity transformation or the risks of mismatches between assets and liabilities and between borrowing and lending rates , delivers a mega bulk for this bank  and this bank has mastered rope . This is where Zenith Bank stands out and this manifests in its Net Interest Income, NII   ; its savvy in the core banking arena could be viewed from this income item which is sensitive to both credit risk and market risk and driven by lending and interest-earning asset volumes as well as the net yield available on these assets after taking into account the cost of funding

This is confirmed by its nine months in 2021 financial report . In the nine months results which are its latest for now, the management of Zenith bank displayed its managerial wizardry it  has  long been  known for . All the key ratios confirmed Zenith Bank’s top rated competence in its ability to lend safely and profitably.

 Its cost of funds dropped to 1.4% from 2.2% while cost of risk was flat at 1.3% Its Net interest margin (NIM) was 7% . In a nutshell, despite continuing economic uncertainties, the Group was able to grow its net earnings through a reduction in its cost of funds, while keeping cost of risk flat.The Group has had a focused drive to increase retail deposits for the past three years, which has supported the decrease in cost of funds by 35% to 1.4% from 2.2% year on year. 

 . Due largely to a drop in earnings from treasury bills of 22% its interest income dropped by 3% to NGN309 billion from NGN319 billion. This decline in yield on assets, reflected the current money market realities. However , this was mitigated by growth in interest income from loans and advances of 9% on the back of an increase in gross loans of 9% year to date.

The Group also reduced the impact of the drop in interest income by enhancing its efficiency which saw interest expense drop by 21% to NGN74 billion from NGN94 billion. The result of this is growth in net interest income of 4%, from NGN225 billion recorded at the end of Q3 2020 to NGN235 billion in the current period. Ultimately , its net interest margin stayed approximately at 7% This means that for every N100 of invested assets (loans to bank customers) the bank made N7 of income after all interest expenses had been paid. The bank made good investment decisions this year and used its resources effectively to generate 7 percent return.

The impacts of the above are vividly indicated in its interest income  .The year 2021 was a tough one for banks, particularly with its dangerous risk terrain but Zenith Bank navigated its ways to escape its scalpel .This strengthened EPS by to NGN5.11

NON INTEREST INCOME

A good manager of a financial institution or bank usually rev up non interest income items of its balance sheet because it holds the key to stabilizing earnings especially in the time the country or interest volatility is a factor . This exactly what Zenith Bank did . The bank non-interest income inched up to N192 .77 billion from N173.49 billion , an 11% increase .

 FEE AND COMMISSION : Another income stream is fee and commission ; 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. Fee income uses less capital and also carries no market risk, but does carry other risks such as operational risk     

A good manager of a financial institution or bank usually rev up non interest income items of its balance sheet because it holds the key to stabilizing earnings especially in the time the country or interest volatility is a factor . This exactly what Zenith Bank did . The bank non-interest income inched up to N192 .77 billion from N173.49 billion , an 11% increase In the period under review, its fee and commission income increased to N78.30 billion from N59.12billion ,32% jump from the corresponding period of 2020 . Banks generate fee income as a result of the provision of services to customers. The impact of this is clear : gross earnings increased by 2% largely due to growth in current account maintenance fees as well as fees from electronic products during the period. The Group continues to make significant progress in its retail banking drive evidenced by remarkable growth in transaction volumes and value across our digital platforms and strong growth in customer acquisitions

TRADING

Finally ,banks generate trading income through trading activity in financial products such as equities (shares) , bonds and derivative instruments. 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 This ,notwithstanding it survived the fangs of this dangerous income source . Albeit marginally, it maintained a positive outlook here .  

.  Zenith Bank ‘s trading income marginally increased by 1 percent to retain a positive outlook to N91billion from N90 billion.

ROBUST BALANCE SHEET

Total assets also increased by 3% to NGN8.8 trillion in the current period ;  total deposits grew by 13% to close at NGN6.0 trillion from NGN5.3 trillion at 31 December 2020, with a substantial contribution from retail deposits. With the liquidity ratio of the Group 52.9% , Loan to deposit ratio at 52.7% ,capital adequacy ratio (CAR) 20.1% ,non-performing loan at 4.50% and coverage ratio at 112.4% ,its balance sheet remains robust and solid

As at the end of 2020 Zenith’s Current Ratio is 0.79 as compared to the GTBank ratio of 0.51. The current ratio indicates liquidity. You can say Zenith has more liquidity relative to GTBank but you can also say GTBank is investing her excess cash more than Zenith.

Within the same period , in terms of financing, Zenith has a higher Debt to Equity Ratio of 1.20 as compared to GTBank 0.27. This indicates that Zenith utilizes more debt financing than equity (N1.34t) as compared to GTBank (N223b). By this it is obviously proving a point that competition for leadership goes beyond acquisition but resourcefulness

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