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Key Takeaways from Zenith Bank H12020 Investors Conference Call

Stock & Analyst Updates	1190 VIEWS
Stock & Analyst Updates
1190 VIEWS

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Saturday, September 12, 2020/ 09:00PM/ by TheAnalyst /Image Credit: Ecographics

Leaning against coronavirus-induced headwinds in H1 2020, Zenith Bank recorded a solid performance, maintaining status as the most profitable bank in Nigeria listed on the Nigerian Stock Exchange (NSE). It posted modest growth in PBT of +2.2%, gross earnings of +4.38%, but saw a leap in shareholder's funds of +20.68%.

Highlights

PBT increased Y-o-Y by +2.2% from N111.7bn in H1 2019 to N114.1bn in H1 2020.
Gross earnings grew Y-o-Y by +4.38% to N346.1bn in H1 2020 from N331.59bn in H1 2019.
Cost-to-income ratio (CIR) increased to 54.3% in H1 2020 from 53.2% in H1 2019. The bank appears to have sustained a stringent cost-containment strategy.
Zenith Bank's non-performing loan (NPL) ratio declined to 4.7% in H1 2020 from 5.3% in H1 2019.
The bank's return on average equity (ROaE) declined marginally from 21.7% to 21.5% Y-o-Y as a result of a stronger capital base
Return on average asset (ROaA) was flat at 3.0% YoY.

Upward Drifting Earnings...But Only Just

Gross Earnings

Zenith's Bank gross earnings rose by +4.38% in H1 2020 Y-o-Y. Its gross earnings increased from N331.59bn in H1 2019 to N331.59bn in H1 2020 (see Chart 1 below).

Chart 1: Zenith Bank's Gross Earnings (N'bn)

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Source: Proshare Research, Zenith Bank Financial Statement

Profit

Zenith Bank's profit before tax (PBT) grew by +2.18% Y-o-Y in H1 2020. Its profit increased from N111.68bn in H1 2019 to N114.12bn in H1 2020. The growth in PBT was significantly driven by growth in net interest income (NII) which grew by +10.5% Y-o-Y and non-interest income which grew by +6% Y-o-Y in H1 2020. Despite a +74.18% growth in the bank's impairment charge, Zenith Bank was able to post an increase in its PBT (see Chart 2 below).

Chart 2: Zenith Bank's PBT (N'bn)

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Source: Proshare Research, Zenith Bank Financial Statement

Loans and Deposits; of Lights and Tunnels

Deposits from Customers

Zenith Bank's deposit from customers maintained its upward momentum in H1 2020. Its deposits from customers rose by +28.61% in H1 2020 Y-o-Y. Its deposits from customers rose from N3.81trn in H1 2019 to N4.9trn in H1 2020. Despite the adverse effect of the coronavirus, Zenith Bank recorded a significant rise in customer deposits in H1 2020, possibly a reflection of increased confidence in the bank's operating stability and the reduction in consumption as the economy shrank and savings increased (see Chart 3 below).

Chart 3: Deposits from Customers (N'bn)

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Source: Proshare Research, Zenith Bank Financial Statement

Gross Loans and Advances

The bank's gross loans and advances increased by +43.59% Y-o-Y in H1 2020. It increased from N1.95trn in H1 2019 to N2.8trn in H1 2020 (see Chart 4 below). The rise in loans and advances was consistent with growth in customer deposits but what was slightly queer was that the loan increase was occurring at a time of a COVID-19 lockdown leaving analysts wondering what type of loan assets Zenith Bank created in an economy that saw a Q1 2020 GDP growth rate of +1.87% and a Q2 2020 GDP growth of -6.10%. No breakdown of the sectoral distribution of the bank's loans and advances was provided in its H1 2020 financials, but between Q1 and Q2 2020, the oil & gas sector was under pressure so as the energy sector, meaning that these leading economic activities were stunted over the period. Analysts noted that even the retail sector was down and under as consumption gave in to lockdown protocols making the banks lending even more impressive. However, a caveat to the loan story is that with a frog leap in lending, the bank may equally see its NPLs rise in coming quarters as loan repayment becomes difficult in an unfurling economic recession in Q3 and Q4 2020. Nevertheless, the growth in the bank's loan portfolio may suggest flickering light at the end of a short but dark economic tunnel between Q2 and Q4 2020.

Chart 4: Loans and Advances (N'bn)

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Source: Proshare Research, Zenith Bank Financial Statement

Shareholder's Fund

Zenith's shareholder's fund rose by +20.68% Y-o-Y in H1 2020. Its shareholder's funds increased from N819.51bn in H1 2019 to N989bn in H1 2020. The increase in shareholder's fund was a signal that the bank was bumping up its retained earnings (rose +1.75% between H1 2019 and H1 2020) and gradually building other reserves (see Chart 5 below).

Chart 5: Shareholder's Fund (N'bn)

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Source: Proshare Research, Zenith Bank Financial Statement

Rising Cost; Adapting to A New Normal

Cost-to-income Ratio (%)

The deposit money lender's cost-to-income ratio (CIR) increased slightly in H1 2020. Its cost-to-income ratio rose from 53.2% in H1 2019 to 54.3% in H1 2020. The increase could be attributed to inflationary pressures and the Group's generally conservative approach to impairment charges in the current elevated risk environment, The bank's CIR is one of the best-in-class for tier1 lenders in the country and reflects an impressive approach to cost containment despite rising domestic inflation rates (domestic inflation was 12.82% in July 2020) (see Chart 6 below).

Chart 6: Cost-to-income Ratio (%)

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Source: Proshare Research, Zenith Bank Financial Statement

NPL Ratio - Mitigating Credit Risk

NPL Ratio (%)

Zenith Bank's NPL ratio declined to 4.7% in H1 2020. Its NPL declined from 5.3% in H1 2019 to 4.7% in H1 2020. To cushion its loan books from credit risk that might arise as a result of the COVID-19 pandemic, Zenith Bank, according to its managers, embarked on different strategies such as engaging customers in key sectors of the economy to better understand their challenges and provide effective and bespoke actions to alleviate their hardships while preserving shareholders' funds, deployment of tools and models to recalibrate and measure the impact of COVID-19 on loan books. The improvement of the quality of the bank's risk assets may prove short-lived if it does not place a tight noose around its newly created loans as a short-term recession in 2020 could compromise loan repayments (see Chart 7 below).

Chart 7: NPL Ratio (%)

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Source: Proshare Research, Zenith Bank Financial Statement

Zenith Bank Strategy & Outlook

Zenith Bank emphasized its commitment towards growth and sustainability by outlining its strategy for growth and identifying growth sectors with a competitive advantage (see Illustrations 1 & 2 below).

Illustration 1: Strategies for Driving Vision

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The strategy of redefining and re-addressing the customer's transaction journey is intelligent but it may require a heavier dependence on cutting-edge technology that does not come cheap. The bank has identified what it considers as growth sectors, but the sectors identified are traditional and could be subject to major disruptions as technology buffs try to address the challenges of the sectors by reshaping their broad operations and revisioning the industries entirely. The COVID-19 reality has put a new spin on what can be accomplished outside the perimeters of old production and service frameworks.

Illustration 2: Driving Profitability with Competitive Advantages

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This emerging change comes with volatility, uncertainty, complexity and ambiguity, Zenith will need to touch base with more than simple outlooks to evolving business expectations and difficulties if it is going to stay ahead of the competition. But so far the bank appears to have done a decent job.