Zenith Bank 9 months 2019 Result; Strong Profit Outlook from Ebusiness, Modest Top Line Earnings


Tuesday, November 12, 2019 /08.45PM / Teslim Shitta-Bey, Managing Editor/ Header Image Credit: Zenith Bank


Zenith Bank Plc's market penetration has cooled over the last few quarters as top line earnings grew modestly. Gross earnings went up by +3.5% from N474.61bn in September 2018 to N491.27bn in September 2019. Profit before tax (PBT) went up from N167.31bn in 9 months 2018 to N176.18bn in the contemporary period of 2019, this represented a pre-tax profit increase of +5.30%.  A tough economy in 2019 has had significant impact on the bank's ability to increase top and bottom line income and the bank will necessarily need to work harder in the last quarter of the year (Q4) to keep operating performance steady.




Income Statement

  • Gross earnings grew moderately by +3.5% Y-o-Y in September 2019, the mild growth in top line earnings reflects a slow economy and a muscling of market share by other deposit money banks (DMBs)
  • Net Interest Income fell -6.08% from N228.52bn in 9 months 2018 to N214.63bn in 9 months 2019, this indicates a weakening in core lending activity
  • Impairment charges ran up from N14.34bn in September 2018 to N18.26bn over the same period of 2019, representing an increase in impairment costs of +27.34%. This is of some concern as the bank's loans and advances only increased by +11.96%, meaning that impairment has tracked ahead of growth in the bank's risk assets, hinting of a diminution in loan quality
  • Net Fee and Commission Income rose from N62.01bn in September 2018 to N73.85bn in the contemporary period of 2019, representing a growth of +19.1%. It seems obvious that Zenith Bank is pushing its non-interest income activities harder to protect the income statement from the vagaries of income from loans and advances. The gradual increase in the non-interest income to interest income ratio is an industry-wide approach to business uncertainty.
  • Apart from fee income, trading income is also gaining momentum amongst local Nigerian banks, Zenith Bank inclusive, the bank's trading income grew from N52.93bn in September 2018 to N66.86bn in September 2019, a notable jump of +26.32% Y-o-Y.
  • The bank's bottom line saw faster growth than gross earnings with profit after tax (PAT) growing from N144.18bn in September 2018 to N150.72bn in September 2019, representing a Y-o-Y growth of +4.54%. 


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Statement of Financial Position

  • Loans and advances went up noticeably between 2018 and 2019 with loans and advances rising from N1.82trn in September 2018 to N2.04trn in September 2018, a rise of +12.09% Y-o-Y. The rise in lending provided a temporary buffer against regulatory risk exposure tied to serial Central Bank (CBN) circulars on bank charges and loan to deposit ratios (currently LDR is set at 65% for all banks by December 2019).
  • As loans went up by a tenth between 2018 and 2019, customer deposits equally moved by +20.43% from N3.28trn in September 2018 to N3.95trn in September 2019, this partly explains why Zenith Bank suffered the largest CBN penalty in respect of its LDR being below the regulatory benchmark of 60% by September 2019.
  • Zenith scaled back its derivatives liabilities winding down these exposures by -33.35% from N15.89bn in September 2018 to N10.59bn in September 2019. The Liability adjustment de-risked the bank's balance sheet and assisted in cutting down its cost of risk.
  • The bank's total assets rose from N5.62trn in September 2018 to N5.98trn in September 2019, a growth of +6.40%. The rise in assets compared with growth in liabilities from N4.84trn in September 2018 to N5.11trn in September 2019, representing an upward lift of +5.58%. 


The profit Machine Stays Strong

Zenith Bank has been a consistent profit engine, with the bank showing both top and bottom line earnings growth but the strength of the growth appears to be waning slightly. Nevertheless, for listed banks on the Nigerian Stock Exchange (NSE), Zenith posted the fourth (33.68%) highest pre-tax margins on gross earnings as at H1 2019 (see chart 1 below). The bank equally posted a strong 31% profit after tax margin in the 9 months to September 2019. Gross earnings growth may have tailed off a bit but the profit margins of the deposit money bank (DMB) has stayed strong.

Admittedly falling growth in Interest Income, may raise concerns as to lower future earnings growth and possibly slower growth of income-generating risk assets but the bank seems to be making up for this by increasing its non-interest income.   


Chart 1 Zenith Bank Profit Before Tax on Gross Earnings Margins H1 2019

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Source: Financial Statements of Selected Banks H1 2019

Zenith Bank's return on asset (RoA) by H1 2019 was the third largest for the banking Industry and rose to 2.59% in September 2019, indicating that the bank is squeezing roughly N2.60 out of every N100 naira invested in bank assets. This was much higher than the N1.90 per N100 worth of assets in H1 2019 (see chart 2 below).

Chart 2 Zenith Bank Return on Assets (RoA) H1 2019

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Source: Financial Statements of Selected Banks H1 2019


Equity holders would be particularly pleased with the bank increasing its return on equity (RoE) from 10.85% in H1 2019 to a more robust 20.21% in 9 months 2019, still placing it as the bank with the third largest RoE in the industry (see chart 3 below).


Chart 3 Zenith Bank Return on Equity (RoE) H1 2019

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Source: Financial Statements of Selected Banks H1 2019

Thinking Through Zenith's RoE

Deconstructing Zenith Bank's RoE shows that the bank is about 7 times leveraged above its equity, this is not unusual and is consistent with the expected leverage of a deposit money bank, Zenith appears to have optimized its equity cleverly in the first 9 months of 2019. The bank's profit before tax as a proportion of gross earnings margin at 35.86% is evidently one of the strongest in the industry, especially when supported by an equally robust asset turnover of 8.22. The combination of the numbers led to a 9 months 2019 RoE of 20.2%, the third largest of the banks in the first three quarters of the year 2019. Zenith bank may be having a slow season in earnings growth but its cost containment strategy appears to be shoring up its profits and bolstering investor confidence (see diagram 1 below).


Diagram 1 Zenith Bank's 9 Months 2019 Return-on-Equity (RoE)

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Heating Up Business

Operating performance of the bank in the 9 months to September 2019 has been consistent with its contemporary performance in 2018. In the 9 months to September 2019 loans and advances rose from N1.82trn in 2018 to N2.043trn in 2019. Customer deposit liabilities went up from N3.28trn in 9 months 2018 to N3.95trn in 2019. The loan to deposit ratio (LDR) also scaled down from 55.71% in 9 months 2018 to 51.70% in 9 months 2019. The figures suggest that the banks core lending and deposit-taking activities have grown steadily but not at a pace fast enough the meet up with the Central Bank of Nigeria's (CBN's) desire to see LDR at 65% by December 2019.  For LDR to rise to 65% in the next two months Zenith Bank would have to increase lending by N525.68bn without an increase in deposit liabilities. This would mean selling-down its 9 months 2019 Treasury bills (T-bills) of N854.33bn or reducing its cash balance of N913.83bn (thereby reducing liquidity) and increasing the bank's cost of risk (CoR) and non-performing loan assets (NPLs) sizably. In Q4 2019, Zenith bank would have to make a number of difficult calls on its statement of financial position.


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Staying Liquid

Corporate liquidity has been stable for Zenith in both 9 months to September 2018 and   9 months to September 2019, but the CBN's recent 65% LDR rule could adversely affect the banks statement of financial position balance. Increasing risk assets and selling down T-bills will reduce liquidity as the discountable T-bill instruments are replaced with non-discountable loans and advances which, based on the slow growth of the economy, could prove 'sticky' in months ahead.

The bank has kept a steady course in respect of liquidity, adjusting for loan assets by a factor of 50%, the liquid asset to total asset ratio of Zenith has been around 68% in both 9 months to September 2018 (68.47%) and 9 months to September 2019 (68.90%).    


Debt-to-Equity Issues

Debt-to-Equity ratio is a matter of small concern to Zenith as its leverage in the first half of the year (H1) was within the conventional rule-of-thumb number of 7 times equity range and demonstrated adequate statement of financial position strength. The Debt-to-Equity ratio at 6.20 was slightly behind Union Bank at 6.17, StanbicIBTC at 5.12 and GT Bank at 4.97 in H1 2009.  In 9 months 2019, Zenith Bank's Debt-to-Equity ratio settled at 5.86 (see chart 4 below for H1 Debt-to-Equity of Nigerian banks).

Chart 4 Zenith Bank Debt- to- Equity (D-to-E) Ratio H1 2019

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Source: Financial Statements of Selected Banks H1 2019


Reviewing The SWOT

A variety of factors have affected performance of Zenith Bank in the 9 months to September 2019 some have been good and others difficult (see Diagram 1 below)


The bank has shown modest gross earnings growth in the first 9 months of 2019 but the relatively mild growth of +3.5% was faster than the +1.94% growth of the whole economy in Q2 2019. The 5% growth in profit before tax was even more important as it showed that some effort was being made at curbing growth in operating cost.


The fact that Zenith Bank's Net Interest Income fell -6.01% hints at a tightness in the spread between deposit cost and interest income. The fall in the spread equally suggests that the deposit composition needs to be rebalanced to reduce average cost of deposits and purchased funds.  On the bright side the +27% rise in non-interest income provides a foil to ease the net interest income decline.


As tight as the domestic economy has become in the last 9 months, opportunities remain evident. Digitization of operations will bring about more efficient service delivery at lower cost reducing CIR. The rise in non-interest income reflects the rise in digital and trade incomes and the possibilities that these emerging transactional businesses could grow faster. With the CBN's regulatory rule that all local banks maintain a deposit to loan ratio or LDR of 65% by December 2019, Zenith may see increased manufacturing and service sector lending with improved rural penetration over Q4 2019. However, with the short time frame to meet the regulators instruction, the bank may still pay a Cash Reserve Requirement (CRR) penalty by year end.


Zenith Bank's pushback against economic headwinds has been admirable, but a few major concerns exist. Serial disruptive circulars by the CBN could hurt year-end 2019 profitability. The September 2019 60% LDR had an undesired effect on the bank's operations, especially its cash reserves. Further challenges that could create problems for the sector is the various taxes by the fiscal authorities and the potential to reduce digital penetration and electronic banking volume. The monetary authority's requirement of a rise in lending, could result in a worsening of bank's non-performing assets (NPLs) resulting in a number of banks exceeding the 5% CBN-limit.    


Diagram 1 Zenith Bank's 9 Months 2019 SWOT Analysis

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Last Line

Zenith Bank has had difficulties with gross earnings but this has not proved fatal to performance, however, a series of moving financial and policy parts could have perverse impact on the bank's income statement in 2019 and this appears to be reflected in the bearish disposition of investors to the bank's equity value year-to-date (YTD) (see chart 5 below)

Chart 5 Zenith Bank's NSE Price and Volume Movement YTD 2019

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Source: Proshare market

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