Zenith Bank Shows Resilience

banking - March 3, 2021

Despite the headwinds that characterised the economy in 2020, Zenith Bank posted improved financial results and rewarded shareholders with handsome dividend payout, writes Goddy Egene

Investors in banks have been apprehensive over the returns they would get on their investments for the 2020 financial year due to the headwinds in the banking sector. Although the entire economy had suffered from many challenges compounded by the covid-19 pandemic, the banking sector was affected more due to regulatory pressure.
A report by Augusto & Co last year had noted that Nigerian banks’ earnings and profitability were expected to decline in 2020.

Earnings from banks’ core business were projected to decline in the short term due to an expected rise in impairment charges and lower yields on their loan books. Also, the contractionary monetary policy stance, fueled by discretionary Cash Reserve Requirement (CRR) debits by the Central Bank of Nigeria (CBN), was expected to affect banks’ overall performance in 2020.

Hence, many investors were highly apprehensive, wondering what the earnings season has in stock for them.

However, Zenith Bank Plc broke the ice to be the first to announce its audited results for the year ended December 30, 2020, showed high resilience and recorded improved performance and recommended higher dividend for the shareholders. Zenith Bank Plc posted net interest income of N299.682 billion, up from N267.031 billion in 2019, while net fee and commission income stood at N79.332 billion as against N100.106 billion in 2019. Impairment charges rose from N24.032 billion to N39.534 billion.

Profit before tax (PBT) grew by 5.2 per cent from N243.294 billion to N255.861 billion, just as profit after tax (PAT) rose by 10.4 per cent to N230.565 billion from N208.843 billion in 2019.

The board has proposed a final dividend of N2.70 per share, to bring the total dividend to N3.00 having paid an interim dividend before now.

Loans and advances improved from N2.306 trillion to N2.779 trillion, while customers’ deposits rose from N4.262 trillion to N5.339 trillion. Total assets rose from N6.347 trillion to N8.481 trillion in 2020.

Commenting on the results, analysts at Cordros Securities stated that Zenith Bank’s performance was above their performance. According to the Lagos-based firm, it had had expected that the combination of a slowdown in business activities due to the pandemic and continual sterilisation of funds by the Central Bank of Nigeria (CBN) would result in weak income generation.

“However, the bank was resilient during the period, with this positive performance ultimately propelled by the strong balance sheet management and much-reduced tax expense,” it added.

Cordros Securities noted that as witnessed all through 2020, non-interest income (NII) generation was strong, settling 8.5 per cent higher at N251.75 billion, explaining that the strong growth recorded was supported by expansions in foreign exchange (FX) revaluation gains (+276.4 per cent to N43.44 billion) and gains on investment securities (+3.3 per cent to N121.68 billion).

“This expansion in NII, alongside the growth in net interest income, led to a 7.7 per cent increase in operating income to N511.89 billion,” the analysts said.

They noted that operating expenses(opex) growth was moderate, as the bank continued to focus on cost management in the face of moderate gross earnings growth.

“Opex grew by 10.4 per cent to N256.03 billion, with the most pressure exerted by other operating expenses (+16.9 per cent to N102.76 billion) such as information technology (IT) and maintenance costs. Consequent to the Opex growth relative to operating income growth, the bank’s cost-to-income ratio (ex-LLE) settled higher at 54.3 per cent (2019 50 per cent).

Also, profitability was stronger, with PBT settling 5.2 per cent higher. However, PAT was 10.4 per cent higher, on account of a 26.6 per cent decline in income tax expense,” they stated.

Breaking down the performance, analysts at Meristem Securities stated that Zenith Bank Plc’s gross earnings in 2020 were supported by non-core income, particularly FX revaluation gains following the devaluation of the Naira during the period.

According to them, the bank recorded a 276.44 per cent growth in FX gains which accounted for 65.42 per cent of the growth in gross earnings in 2020.

“Strong growth (+28.57 per cent) in interest earning assets helped keep interest income afloat as the interest rate environment stayed depressed during the period. Trading income was, however, a beneficiary of the relatively low interest rates as the bank was able to book significant capital gains on its investment securities. “Expectedly, fee-based income declined significantly by 20.75 per cent owing to the new fee regime on electronic transactions which became effective in January 2020. By and large, the bank’s 2020 gross earnings which grew by 7.53 per cent to N696.45 billion outperformed our expectations by 4.41 per cent. However, as noted above, growth stemmed mostly from a volatile income line–FXrevaluation gains,” Meristem Securities said.

The firm explained that while the bank’s strong assets growth is commendable, it did not translate to a growth in net interest margin (NIM) despite an 18.45 per cent decline in interest expense. This was partly because some of the growth in loan book was due to the translation effect of foreign currency (FCY) loans following Naira devaluation.

“NIM thus fell to 7.90 per cent (vs.8.20 per cent in 2019).After moderating in Q3:2020, impairment charges spiked in Q4 2020 to provide adequate cover for stage 3 loans following a significant write-off of N53.81 billion. Management has guided that it expects a higher CoR o f2.00 per cent in 2021.

“Cost-to-Income ratio inched up to 50.00 (vs. 48.80 per cent) on the back of higher impairment charges, information technology (IT) spending (to support the business continuity plan triggered by the pandemic), and general inflationary pressure,” they said.

The analysts said although the bottom line grew by 10.40 per cent to N230.57 billion, supported by lower income tax, both return on average asset(ROAA) and return on average equity (ROAE) declined marginally to 22.40 per cent and 3.10 per cent respectively.

“We expect funding costs to remain within the 3.00 per cent to 3.50 per cent band, while NIM should improve given the current trajectory of interest rates, especially as management has guided that loans will be repriced,” they said.

Meristem Securities noted that Zenith Bank operated from a solid funding base which continued to support assets growth.

“While the bank has maintained an excellent prudential standing so far, we are concerned about adverse changes in loan quality due largely to the pandemic. We refer in particularly to the reclassification of N359.01 billion Stage 1 loans to Stage 2 during the period. This could pressure asset quality which currently stands at 4.29 per cent in 2021,” they said.

One that stood at in the results of Zenith Bank is the retail deposits that witnessed a growth of 24 per cent despite the pandemic. Explaining the development, the Group Managing Director of Zenith Bank Plc, Mr. Ebenezer Onyeagwu, attributed to the acceleration of retail and digital banking initiatives. According to him, retail deposit moved from N1.1 trillion to N1.7 trillion, with savings moving from N600 billion to N1.1 trillion and accounting for 88 per cent increase in deposits.

Onyeagwu has assured stakeholders that the bank would remain resilience, noting that it is a market leader, creative and has the capability to respond to adversity as they come.

“ As long as we are able to reinforce that, we would ensure that we are able to drive resilience within the team, we would drive doggedness, and we would also diligence to navigate the landscape. We would be expanding our digital and retail banking initiatives because we can see the progress and impact it has had on our activities.

“We would also ensure that we key into emerging opportunities in the country as they continue to unfold. Two key areas are agric and ICT. So, we would reinforce our identity as Zenith, we would retain our market leadership. The important thing for me is that I have a brilliant and excellent team,” the Zenith Bank boss declared.

Responding to a question on the bank’s acquisition plan, Onyeagwu said: “First is to say that Zenith Bank has grown organically, we are disciplined, we are focused and we look for where to extract value.

“However, we would not do a deal or a corporate action just for the sake of doing it. If we find a deal that fits into our profile, of course we would do a deal. It has to be something that fits into our profile.

“Until we find such, we would continue to grow organically. We are already in Ghana, we are in Sierra Leone, Gambia, UK and by no means that is not to say that we cannot expand beyond this location. It depends on what we see as events continue to unfold.”

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