Nigeria: Zenith Bank's Income Diversification Pays Off

28 August 2019

Goddy Egene writes that with a 169 per cent growth in fees on electronic products, which impacted significantly on non-interest income, Zenith Bank Plc's drive to use its electronic platforms to drive retail business is paying off.

The operating environment is very tough and only companies with visionary management and good strategy are surviving and making profits. The banking industry is even getting tougher to operate in considering the stronger regulation coming from the Central Bank of Nigeria (CBN). Margins are getting thinner, thereby making banks to be more creative in order to sustain their previous performances and deliver returns to shareholders.

Despite the challenging operating environment, Zenith Bank Plc reported improved performance for the half (HI) year ended June 30, 2019. The bank did not only surpass its performance in the corresponding period of 2018, but also rewarded the shareholders with an interim dividend of N9.42 billion, which translated to 30 kobo per share.

Details of the H1 2019 results showed gross earnings of N331.6 billion, an increase of 2.9 per cent compared with N322.2 billion in the corresponding period of 2018. Net interest income fell from N154 billion to N142.5 billion, while credit impairment charges rose by 48.2 per cent from N9.3 billion to N13.7 billion. The bank ended the period with a profit before tax of N111.7 billion, up by four per cent compared with N107.4 billion, while PAT grew faster by 8.7 per cent to N88.9 billion, from N81.7 billion in 2018.

Analysts' Comments

Market analysts have been assessing the performance of the bank. For instance, analysts at Cordros Capital Limited said the gross earnings recorded remained in line with their 2019 full year (FY-19) estimate and would settle 1.30 per cent lower based on the current run rate.

"The top-line growth was primarily supported by the 23.86 per cent expansion in non-interest income, which was boosted by net fees and commissions (+33.62 per cent) and trading gains (+22.53 per cent) income growth. The growth in non-interest income is outpacing our FY-19 estimate, which at the current run-rate would settle 5.40 per cent higher," they said.

Cordros Capital noted that on the other hand, interest income declined by 6.15 per cent, driven by weak risk asset creation and declining yields on fixed-income securities.

"Consequently, income from loans and advances to customers declined by 21.43 per cent, completely offsetting the 21.1 per cent growth in income from investment securities. Similarly, interest expense declined by 3.51 per cent, partly offsetting the impact of the declining interest income, however, net interest income still printed 7.43 per cent lower," they added.

According to them, the bank's macro-prudential ratios are above par, with only the non-performing loans ratio settling above the regulatory limit (5.3 per cent relative to 5.0 per cent statutory limit).

"All other ratios are settled well above regulatory minimums; Liquidity ratio (74.6 per cent relative to 30 per cent), Capital Adequacy (25 per cent relative to 16 per cent). We note that the bank's current reported loans to deposit ratio (51.2 per cent) is below the new minimum LDR of 60 per cent. However, this does not seem to have been adjusted for the new weightings for the retail, SMEs, consumer credit and mortgage segments. We will seek clarity here, as the financials do not hold enough information on exposures to these segments, save for consumer credit which is 1.93 per cent of the gross loans exposure. Hence, we could not accurately recalculate the LDR," they said.

In a similar vein, analysts at WSTC Securities Limited said declining risk asset depressed interest income Interest income declined by six per cent from N228.67 billion to N214.6 billion in H1 2019, owing to the decrease in yields on interest-bearing assets as well as declining assets base.

"Expressly, loan books declined by three per cent from N2.01 trillion to N1.95 trillion in H1 2019 on the back of management aversion to risky assets which resulted to a steep decline of 21 per cent in interest income on loan and advances (a primary driver of interest and similar income). Though revenue from other interest-bearing assets (treasury bills, government and other bonds among others) rose for the period, it was not enough to offset for the decline in risky income due to the declining yield on risk-free securities," they said.

According to the analysts, interest expense declined by four per cent from N74.71 billion to N72.09 billion in H1 2019 primarily on account of a four per cent, eight per cent and six per cent decline on interest on current accounts, time deposits and borrowed funds, respectively.

While the decrease in interest expense further reinforces management drive towards the cost of funds optimisation, which declined by 40bps to three per cent, the steeper decline in interest income eroded these gains.

"Consequently, the net interest margin declined by 150bps to nine per cent and net interest income shrunk by seven per cent from N153.96 billion to N142.52 billion in H1 2019.

Benign operating cost lifts bottom-line non-interest income grew by 24 per cent from N88.60 billion to N109.73 billion, underpinning income diversification effort of the group. The robust growth was informed mainly by fees on electronic products, which grew by 169 per cent as the group continues to consolidate on its electronic platforms to drive retail business. Credit-related fees and account management fee also increased by 44 per cent and nine per cent, respectively," they added.

However, on the strength of the robust growth in non-interest income and muted increase of one per cent in total operating expense, PBT grew from N107.36 billion to N111.68 billion in H1 2019, and PAT stood at N88.88 billion, up from N81.7 billion, delivering a return on average equity of 22 per cent as against 21 per cent in 2018.

WSTC in their first quarter (Q1) 2019 report, posited that cost optimisation strategy and deepening of the retail segment of the business would underpin performance in full year of 2019. They noted that the impressive growth in the group's non-interest income driven by fee on electronic product and the benign operational cost has affirmed these biases.

"Thus, our opinion has not changed. We continue to maintain our constructive view on the group on the back drop of revenue base diversification effort by management amid funding cost optimisation.

"We have a revised forward EPS of N6.41 and a fair value estimate of N29.83. At the current market price of N18.70 as at Monday, the stock is trading at a discount of 59 per cent to our fair value estimate. Thus, we uphold our Buy recommendation.

Strengthening management

In apparent move to strengthen its management and enhance its performance going forward, Zenith Bank Plc has appointed Mr. Henry Oroh as executive director(ED) of the bank and Dr. Al-Mujtaba Abubakar, as an independent non-executive director. Both appointments are effective September 1, 2019 and have been approved by the CBN, are coming two months after Mr. Ebenezer Onyeagwu as assumed office as the managing director/CEO officer of the bank.

Oroh, who has over two decades of banking industry experience, holds a Bachelor's Degree in Accounting from the University of Benin, Benin City and an MBA from the Lagos State University as well as LLB Degree from the University of London. He is a Fellow of the Institute of Chartered Accountants of Nigeria and an honorary member of the Chartered Institute of Bankers, Nigeria.

He began his banking career in 1992 at Citibank where he served for seven years in operations, treasury and marketing. He joined Zenith Bank in February 1999 and has worked in various groups and departments within the Zenith Group office. His expertise spans operations, information technology, treasury, marketing, including the manufacturing, food and beverages, pharmaceuticals, oil and gas, public sector, consumer as well as corporate banking and business development.

In April 2012, he was seconded to Zenith Bank Ghana Limited as an ED and became the MD/CEO in February 2016 where he successfully spearheaded the phenomenal growth of the Zenith brand both within the Ghana market and the West African Sub-region.

Oroh has attended several leadership programmes and executive management courses at The Harvard Business School, Columbia Business School New York, University of Chicago, United States of America (USA), University of Pennsylvania, HEC Paris, JP Morgan Chase United Kingdom and the Lagos Business School.

On the other hand, Abubakar is currently the MD of Apt Pensions Funds Managers Limited. He is a graduate of the Leeds Polytechnic UK. He is a renowned Chartered Accountant and a Fellow of the Institute of Chartered Accountants of Nigeria (FCA).

Abubakar has extensive and tremendous experience in the financial services industry, audit and consulting.

He had worked with the firm of Akintola Williams Deloitte between January 2000 and November 2008 and rose to become the Partner and Board Member of West Africa Sub region. Prior to this, he had served on the Board of several financial institutions in Nigeria.

He has attended several management and leadership training programmes and conferences both within and outside the country.

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