Zenith Bank FY2020 Results: Mild Earnings Growth, Strong Assets Surge

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Sunday, February 28, 2021, / 07:00 AM / By Adaeze Nwachukwu, Proshare Research   / Header Image Credit: Zenith bank Plc 


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The full-year (FY) 2020 unaudited result of Zenith bank Plc showed resilience and marginal growth in top and bottom-line earnings numbers, despite the headwinds caused by the COVID-19 pandemic. Nevertheless, earnings were adversely affected after adjusting for currency translation into US dollar terms. The devaluation of the domestic currency which is the reporting currency of the group took its toll on the group's earnings for 2020. The leading financial institution in Nigeria by equity size recorded a significant Y-o-Y growth of +169.81% in its debt size, thereby, increasing its leverage ratio to 77.86% in 2020. The Nigerian operation accounted for much of the group's gross earnings and profit before tax while the European operations accounted for the least.

 

Key Highlights/Takeaways

  • Gross earnings increased Year-on-Year (Y-o-Y) by +5.16% from N662.25bn in 2019 to N696.45bn in 2020 (fell by -15.28% in USD terms to US$1.82bn in 2020).
  • Profit before tax grew by +5.17% Y-o-Y from N243.29bn in 2019 to N255.86bn in 2020 (declined by -15.27% in USD to US$671.55m in 2020).
  • Earnings per share increased Y-o-Y by +10.38% from N6.65 in 2019 to N7.34 in 2020.
  • Total assets increased Y-o-Y by +33.63% from N6.35trn in 2019 to N8.48trn in 2020 (increased by +7.66% in USD terms to US$22.26bn in 2020)
  • Total equity grew Y-o-Y by +18.64% from N941.89bn in 2019 to N1.12trn in 2020 (fell by -4.42% in USD terms to $2.93bn in 2020).
  • Return on average equity declined Y-o-Y by -5.88% from 23.80% in 2019 to 22.40% in 2020.
  • Return on average assets declined by -8.82% Y-o-Y from 3.40% in 2019 to 3.10% in 2020.
  • NPL declined marginally by -0.23% Y-o-Y from 4.30% in 2019 to 4.29% in 2020.
  • Agency banking has grown significantly in value and volume since its inception in 2019 driven majorly by the group's investment in IT
  • Growth in the group's loan book was driven by the translation cost of the existing loan in foreign currency. The current value of the domestic currency was used in translating which is higher than the exchange rate used when these loans were issued.
  • Drivers of the group's FX outlook were an increase in IMTOs, increase FX inflow from export repatriation, recovery in the oil price which will lead to an increase in foreign reserve of the Nation. The managers of the group were positive about reduced volatility in foreign exchange.
  • The group's loan book is in good shape, as several checks are done when issuing out loans in order not to run the risk of bad loans, safe to say, the group expects to see a decline in its impairment charges as macroeconomic challenges are addressed to ensure a less risky business environment.
  • The group recorded Y-o-Y growth in all geographical subsidiaries.
  • The group focused on growing its business and increasing its value, with less attention to pursuing a HoldCo structure.

 

Share Price and Volume Traded-A Mixed Ball of Sentiments

Share price movement was significantly affected by the uncertainty and harsh macroeconomic challenges that were induced by the COVID-19 pandemic. However, Zenith bank's share price ended the year 2020 on a bullish note, rising by +18.94% at the end of the year. At the peak of the pandemic and lockdowns, the bank's equity price fell as low as N11.70, in March 2020. For year-to-date (YTD) performance, share price rose by +6.05% as of 24 February 2021.

 

Volume of shares traded saw irregular movement. The bank's volume traded fell by -7.14% in 2020, in July 2020 the bank recorded its lowest volume compared to January 2020 when it recorded its highest traded volume for the year. Its YTD performance showed that traded volume increased by +27.51% as of 24 February 2021 (see chart 1).

 

Chart 1: Zenith Bank's Share price and Volume Traded as of 24 Feb. 21

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Source: NSE, Proshare Research


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Profitability -Steady as She Goes

Gross earnings of Zenith Bank for the period grew marginally by +5.16% Y-o-Y despite the macroeconomic challenges caused by the COVID-19 pandemic. From N662.25bn in 2019 to N696.45bn in 2020.


2017 recorded the highest percentage of +46.69% change in gross earnings while 2018 had the highest percentage decline of -15.41% during the period of review.

 

Contrary to growth recorded in Naira terms, gross earnings declined by -15.28% after translating to US dollar terms. From $2.16bn in 2019 to $1.83bn in 2020, this was a result of the devaluation of the domestic currency. Official CBN's rates during the different periods were used in translating the figures to US dollar terms (see chart 2).

 

Chart 2: Zenith Bank's Gross Earnings 2016 - 2020 (N'bn)

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Source: Zenith Bank Financial Statement, Proshare Research

 

Profit before tax (PBT) of the group rose marginally, it grew by +5.17% Y-o-Y from N243.29bn in 2019 from N255.86bn in 2020. Growth in PBT was driven by a -18.45% decline in interest expense and a +1.26% Y-o-Y rise in interest income. Translating the group's profit to US dollars, PBT declined by -15.27% Y-o-Y from $792m in 2019 to $671.55m in 2020 (see chart 3).

 

Chart 3: Zenith Bank's Profit Before Tax 2016 - 2020 (N'bn)

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Source: Zenith Bank Financial Statement, Proshare Research

 

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Impairment Charges-The Good and Bad

The group's impairment charges grew notably in 2020, it rose by +64.51% Y-o-Y, from N24.03bn in 2019 to N39.53bn in 2020.

 

The latest result also reveals that the impairment charges-to-gross loans ratio rose from 0.98% in 2019 to 1.84% in 2020. This was as a result of the Y-o-Y increase in impairments while gross loans declined by -12.54% Y-o-Y.

 

Analysts note that 2017 recorded the highest percentage growth in impairments with a +203.64% change while 2018 saw the largest decline in impairments of -81.30% (see chart 4).

 

Chart 4: Zenith Bank's Impairment Charges 2016 - 2020 (N'bn)

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Source: Zenith Bank Financial Statement, Proshare Research


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Costs-The Mildly Sour Taste of A Rise

Zenith's cost-to-income ratio (CIR) rose marginally to 50.0% in 2020 from 48.8% in 2019. The growth in CIR was as a result of inflationary pressures and heightened regulatory costs.

 

Other operating income grew by +256.89% Y-o-Y while operating expense grew by +14.41% in 2020 (see chart 5).

 

 

Chart 5: Zenith Bank's Cost-to-Income Ratio 2016 - 2020

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Source: Zenith Bank Financial Statement, Proshare Research

 

Asset Quality-Still Ship Shape

Non-performing loans (NPLs) declined marginally in 2020, from 4.30% in 2019 to 4.29% in 2020. NPLs rose highest in 2018 while they were lowest in 2016 (see chart 6).

 

The latest audited result showed that  Zenith bank was largely exposed to the oil and gas. In 2020, oil and gas accounted for 29.87% of the group's NPL, however, this was a marginal decline from 30.75% in 2019.

 

Chart 6: Zenith Bank's Non-Performing Loan 2016 - 2020

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Source: Zenith Bank Financial Statement, Proshare Research

 

Zenith bank's growth in total assets has been steady over the last few years, for 2020 total assets grew by +33.63% Y-o-Y from N6.35trn in 2019 to N8.48trn in 2020. Growth in total assets for 2020 was largely the result of a +70.01% Y-o-Y growth in cash and bank balances with central banks and +59.16% growth in treasury bills for the period.

 

 

In US dollar terms, total assets grew Y-o-Y but at a lower rate than the growth in the domestic currency, the naira. Total assets grew by +7.66% from US$20.68bn in 2019 to US$22.26bn in 2020 (see chart 7).

 

Chart 7: Zenith Bank's Total Assets 2016 - 2020 (N'trn)

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Source: Zenith Bank Financial Statement, Proshare Research


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Loans and Deposits- A Soft Slide

The group's loan-to-deposit ratio (LDR) fell marginally in 2020, the banking conglomerate's LDR remained below the central bank's minimum regulatory requirement of 60%. Zenith Bank's LDR dropped to 54.70% in 2020 from 57.8% in 2019. The group recorded its highest LDR of 67.80% in 2016 while it posted its lowest LDR of 44.2% in 2018.

 

The total loan portfolio of the bank grew by +20.54% Y-o-Y which was lower than the +25.28% Y-o-Y growth in total customer deposits (see chart 8).


 

Chart 8: Zenith Bank's Loan-to-Deposit Ratio 2016 - 2020

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Source: Zenith Bank Financial Statement, Proshare Research

 

Liquidity-Money in the System

The group's liquidity grew from 57.30% in 2019 to 66.20% in 2020. Meanwhile its Capital adequacy ratio (CAR) equally saw a marginal increase from 22.0% in 2019 to 23.0% in 2020.

 

Both liquidity ratio and the CAR of the group were above the regulatory prescribed minimum of 27.5% for LDR and 30% for CAR (see chart 9).

 

Chart 9: Zenith Bank's Liquidity and Capital Adequacy Ratio 2016 - 2020

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Source: Zenith Bank Financial Statement, Proshare Research

 

Shareholders Fund

Total equity grew Y-o-Y by +18.64% from N941.89bn in 2019 to N1.12trn in 2020. The equity growth was propelled by a +26.24% increase in retained earnings and a +26.03% increase in other reserves of the group.

 

Total equity accounted for 14.4% of the total funding mix of the group, this was a decline from the 15.8% for 2019.

 

The debt-to-equity ratio increased markedly in 2020, from 34.24% in 2019 to 77.86% in 2020. This was pushed by the +169.81% growth in total debt of the group which outstripped the +18.64% growth in equity.

 

Translating to US dollar terms, total equity declined by -4.42% Y-o-Y in contrast to the growth recorded in naira. Equity in US dollars fell from US$3.07bn in 2019 to US$2.93bn in 2020, reflecting the impact of the naira devaluation between both years (see chart 10).

 

Chart 10: Zenith Bank's Total Equity 2016 - 2020 (N'bn)

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Source: Zenith Bank Financial Statement, Proshare Research


The Zenith banking group put up a decent performance in 2020 considering disruptions caused by the COVID-19 global health pandemic and disruptions to production supply chains and general global economic activity. 

 

The bank may do much better ingrowing top and bottom line earnings in 2021 as the unlikely event of a second round of lockdowns would support faster economic growth, stronger supply chain activities and a restoration of travels and an improvement in non-telecomms service sector incomes.

 

The harsh headwinds of 2020 may turn into agreeable tailwinds in 2021 as business activities perk up and better lending propositions open on the back of restored business activities. As one of Nigeria's largest Tier 1 banking institutions by asset size, Zenith's 2021 outlook, barring a COVID-induced double dip looks strong with earnings per share expectation up between an additional 8% and 12%. Not bad, all considered.

 


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