FYE 2019: Key Takeaways From Zenith Bank's Investors Conference Call


Tuesday, March 03, 2020, /  06.00AM / Teslim Shitta-Bey, Managing Editor and Saheed Kiaribe, Director of Research, Header Image Credit: Proshare


Zenith Bank's financial performance in 2019 saw the bank grow both its top and bottom-line earnings but net interest margins stayed stuck at 3.0% in 2018 and 2019. The key highlights of the bank's recent Investor's Conference call included the following:


  • Profit before tax increased from N232bn in 2018 to N243bn in 2019, a growth of +5.0% year-on-year (Y-o-Y)
  • Both returns on asset and equity were flat. Return on average asset (RoAA) rose from 3.3% in 2018 to 3.4% in 2019. Return on equity on the other hand remained at 23.8% in both 2018 and 2019. RoAA for the bank has remained fairly flat in the last three years reflecting the stuttering effect of a post-recessionary economy since 2017. RoAE has also been fairly flat in the last three years rising from 22.9% in 2017 to 23.8% in 2018 and 23.8% in 2019. Nevertheless, with inflation at +11.98% as at the end of 2019, the inflation-adjusted equity return of the bank was positive.
  • Even though the bank's net interest margin remained unchanged its cost of funds was noticeably lower, falling from 8.9% in both 2017 and 2018 to 8.2% in 2019, a fall of 70 basis points. The fall in the bank's cost of funds became greenlighted by a slide in its cost-to-income ratio (CIR) from 49.3% in 2018 to 48.8% in 2019. The decrease in costs suggests that Zenith has deliberately adopted a generic cost-containment strategy to stay competitive. The cost reduction strategy is, nevertheless, classic and may not represent a sustainable competitive approach. Reducing the cost of operations in the financial service sector appears to be a necessary, but not sufficient, approach to cope with the intensity of competitive pressure; banks will need to do more, including Zenith Bank.
  • The bank increased its customer deposit by +15.5%, from N3.69trn in 2018 to N4.26trn in 2019. The higher deposits would aid in bringing down the bank's cost of funds, especially if most of the new deposits are in current and savings accounts.
  • The loan assets of the bank grew by +22.1% from N2.16trn in 2018 to N2.46trn in 2019. The rise in the bank's loan assets led to an improvement in profit growth (profit after tax grew by +7.8% over the period) and moved the bank closer to CBN's loan-to-deposit ratio (LDR) requirement of 65%. The slower growth in deposit and faster growth in lending supported the bank's required LDR in 2019.
  • Non-interest income growth was a major point of reference for Zenith Bank as this P&L item rose by +29% Y-o-Y from N164.79bn in 2018 to N232.1bn in 2019. 




Zenith Bank's profit before tax (PBT) growth between 2018 and 2019 was unexpectedly lean rising by +5.0% Y-o-Y. The modest growth in the bank's PBT was, however, countered by a more aggressive and impressive rise in its non-interest income which grew by +29.0% Y-o-Y. The shift in the rise of non-interest income may sterilize the bank's P&L statement from uncertainties surrounding interest income and CBN credit and liquidity policies. If the non-interest income continues to grow, Zenith Bank should be able to fend off a potential recessionary coronavirus-induced economic blowback in 2020 (see chart 1 below).


Chart 1 Zenith Bank Profit Before Tax 2009-2018

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Source: Zenith Bank, Audited Financial Statement 2009-2018

Asset Quality

Zenith Bank's non-performing loans (NPL) have had an irregular history in the last ten years. The bank's NPL fell from 6.26% in Q4 2009 to 5.9% in Q4 2010 until it fell to its lowest NPL of 1.63% in 2015 at the beginning of an emerging recession. In 2016 Zenith's NPL went back up to 3% in Q4 2016 and 4.7% in Q4 2017. By Q4 2018 the bank's NPL had climbed to 4.98%, reflecting a worsening loan asset quality. The bank's FYE 2019 numbers, nevertheless, seem to show that the bank has begun to tackle the issue frontally with its NPL falling to 4.30%. However, analysts are conscious of the fact that with growing loan portfolio size, Zenith's NPL for year-end 2020 may either stay at 4.30% or rise slightly, despite its forward indicative projection of 4.20% (see chart 2 below).


Chart 2 Zenith Bank NPLs 2009-2018


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Source: Zenith Bank, Audited Financial Statement 2009-2018

Rising bank NPLs tend to serve as warnings of future loan impairment charges (especially post IFRS9) and weakening loan administration processes ( in an attempt to meet CBN's 65% LDR requirement). Zenith Bank's NPLs do not sound any alarm bells at the moment but the bank's pacy lending growth may but analysts on notice (see illustration 1 below).

Illustration1 NPL Warning Signals

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Liquidity is less of a problem for Zenith Bank than for some tier 1 competitors. Zenith Bank's liquidity ratio between Q4 2010 and Q4 2013 has averaged above 55.6% before dipping to 37.7% in Q4 2014 and 40.8% in Q4 2015 signalling pre-recession loan challenges. Riding on a slight economic recovery between 2017 and 2018, the bank appears to have had improved liquidity (see chart 3 below).

Chart 3 Zenith Bank's Liquidity ratio 2010-2018

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Source: Zenith Bank, Audited Financial Statement 2009-2018



Zenith bank's leverage ratio has risen steadily as liabilities exceed equity of a sustainable basis. The growth deposit liabilities relative to a rise in equity has meant that the bank has depended on more leverage to fund lending activities, this is not unusual for a bank and actually improves return on average shareholder equity (RoAE). The bank's leverage faultered during the economic recession between 2015 and 2016, but started gaining momentum from 2017. The rise in leverage coincided with improvements in profitablility (see chart 4 below).

Chart 4 Zenith Bank's Leverage ratio 2010-2018

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Source: Zenith Bank, Audited Financial Statement 2009-2018 



Zenith's strategic imperative appears somewhat generic with clear efforts at cost reduction, strategic focus on low cost funds and non-interest income from trading and digital transactions and an attempt at differentiaon in what essentially is a "commoditized" industry. Weaving a competition beating strategy is yet a manifest reality but the bank has shown resilience. Nevertheless, if interest rates fall (not likely anytime soon with inflation at 12.13%), bank operating margins may take a beating, and this is where the bank's fee-based businesses may prove to be strategic gems (see illustration 2 below).

Illustration 2 Zenith Bank's Generic Strategies

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Source: Zenith Bank, Audited Financial Statement 2009-2018

With 2020 starting off on a slow note, Zenith bank's guidance numbers for the year are beginning to look increasingly optimistic, but a lot will depend on the moving domestic and international economic parts in Q1 and Q2 2020. However, in the interim, the tea leaves still look a bit misty.

Editor’s Note: A more detailed analysis of Zenith bank’s performance in 2019 and strategic imperatives will appear in Proshare’s H2 2019 Banking Sector Report.

Visit Zenith Bank Plc IR Page in Proshare MARKETS

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