BY AMBROSE OMORDION
The Nigerian banking industry has remained relatively resilient over the years, despite the raging domestic macro-economic and global economic headwinds which have combined to constrain performance in the last five years.
However, the performance has been against the backdrop of sluggish national economic growth, with GDP growth decelerating steadily from its 3.4 per cent rebound in 2021 following the COVID-19 pandemic, to 2.74 per cent in 2023. Innovation and malleability of the banks as reflected in the transition by most to the financial holding company structure, and upscale of banking licenses by some, thereby diversifying their income and profit, have upheld the industry. Collaborations with Financial Technology companies (FinTechs), as well as domestic and international Development Finance Institutions (DFIs), among others have equally supported the Nigerian banking industry.
Given the critical role of the sector in spurring economic activity and growth through financial inter-mediation, it is unarguably pivotal to propelling Nigeria’s growth over the coming decades. Following its inauguration, the administration of President Bola Tinubu administration has implemented several reforms aimed at reversing the prevailing macroeconomic imbalances. The reforms include the removal of the petrol subsidy, exchange rate harmonisation, tax reforms and restoration of a methodical framework for calculating the Cash Reserve Requirements (CRR) will provide growth opportunities for the industry.
In line with the ambition of the Federal Government to achieve a US$1.0 trillion economy by 2030, the CBN has highlighted the need for stronger and better capitalised banks that are better equipped to service the needs occasioned by such growth, thus necessitating the call for recapitalisation.
Historical, the Nigerian banking sector has witnessed several recapitalisation episodes in a bid to shore up the minimum capital required to remain in business, the most ambitious and yet audacious being the 2004-2005 banking recapitalisation exercise that helped to strengthen the sector, reducing operators from 89 to 25. While that cleansing addressed the corporate governance deficiencies and birthed the necessary financial stability, technological innovations, international competitiveness and reputation, it had its flaws.
The exercise showed the obvious absence of the lack of the requisite capacity among most of the operators, following which the ensuing excess capital helped the creation of unhealthy loans in a bid to make the new capital sweat. This led to a ballooning of the non-performing loans, birthing other risk management issues resulting in the repeal of the Universal Banking model, establishment of the Asset Management Corporation of Nigerian (AMCON), and the revised capital requirement in 2010.
In the light of the above, in its March 2024 capital requirement guideline, the CBN announced a new capital structure for banks under different licenses with the aim of strengthening the financial system further and aiding the government’s target. The new capital base for banks becomes pertinent, given the clear erosion of banks’ capital buffer post-2010 from a real and FX perspective, compared to the 2010 levels. Using the 2023 average, the existing minimum capital size has lost 77.1% and 76.5% in FX and real terms respectively. To shore up the capital gap, the CBN considered the impact of macro-economic headwinds on banks’ risk profile and financial position in defining the new threshold.
While these criteria appear robust, the new capital threshold, unfortunately, may not stand the test of time should there be unprecedented macroeconomic shocks.
Zenith Bank Plc was established in May 1990, and commenced operations in July of the same year as a commercial bank. It became a public limited company on June 17, 2004 and became listed on the then Nigerian Stock Exchange (now Nigerian Exchange Limited) on October 21, 2004, following a highly successful Initial Public Offering (IPO). Zenith currently has a shareholder base of over half a million, and is Nigeria’s biggest bank by tier-1 capital. In 2013, the bank listed $850 million worth of its shares at $6.80 each on the London Stock Exchange (LSE).
Headquartered in Lagos, Nigeria, Zenith has 393 branches and business offices in prime commercial centres in all states of the federation and the Federal Capital Territory (FCT). In March 2007, Zenith Bank was licensed by the Financial Services Authority (FSA) of the United Kingdom to establish Zenith Bank (UK) Limited as the United Kingdom subsidiary of Zenith Bank Plc.
Zenith Bank also has subsidiaries in: Ghana, Zenith Bank (Ghana) Limited; Sierra Leone, Zenith Bank (Sierra Leone) Limited; Gambia, Zenith Bank (Gambia) Limited, in addition to a representative office in The People’s Republic of China. Plans are afoot to take the brand to other African countries as well as the European and Asian markets.
Zenith Bank blazed the trail in digital banking in Nigeria; scoring several firsts in the deployment of Information and Communication Technology (ICT) infrastructure to create innovative products that meet the needs of its teeming customers.
The bank is verifiably a leader in the deployment of various channels of banking technology, and the Zenith brand has become synonymous with the deployment of state-of-the-art technologies in banking.
Driven by a culture of excellence and strict adherence to global best practices, the Bank has combined vision, skilful banking expertise, and cutting-edge technology to create products and services that anticipate and meet customers’ expectations; enable businesses to thrive and grow wealth for customers.
Over the years, Zenith Bank has grown into a leading financial powerhouse in Africa and currently ranks as the 10th biggest bank on the continent. Its shareholder’s fund of ₦20 million in 1990 had grown to ₦1.38 trillion as at year end 2022. Today, Zenith Bank continues to thrive on the strong values, brand equity, corporate culture of professionalism and service excellence which are the foundations upon which the bank was built.
In line with its decision to adopt the commercial banking license with international authorisation, Zenith Bank will continue to offer specialised financial services such as Corporate, Investment and Retail Banking, Commercial and Consumer Banking, Personal and Private Banking. Trade Services and Foreign Exchange, Treasury and Cash Management Services, and Pension Management. Other Non-Bank Financial Services such as Insurance, Capital Market dealings, Trusteeship, Registrar, Mortgage and financial advisory services would be handled through its subsidiaries in line with its HoldCo Scheme of Arrangement.
In its audited financial statements (AFS) for the year ended December (FY-2023) 2023, both Gross earnings (GE) and Net Income (PAT) rose by 127.6% and 202.3% to settle at ₦2.15 trillion and ₦676.91 billion, respectively, compared to FY-2022 numbers.
The GE performance was strongly driven by Interest Income (INC), which rose by 111.9% y/y to ₦1.14 trillion. Other contributors to the GE are Fees and Commission Income (16.1% of the GE), and Trading Income (14.7% of the GE).
Notably, performance improved despite macroeconomic headwinds that resulted in rising interest and inflation rates in 2023. Like its peers, Zenith Bank was able to needle foreign exchange (FX) gains from its open FX positions. Although, this is not expected to repeat itself in 2024 after the Central Bank of Nigeria (CBN) ordered local banks to maintain a zero-forward position, meaning they cannot take advantage of unused FX balances for trading gains. However, the bank’s underlying performance from its operations was impressive.
The lender’s net interest income rose by 100.80% between FY 2022 and FY 2023. This suggests the bank was to fashion a decent spread in its core lending and deposit-taking activities. Amid the improvement in income heads, computed FY ’23 earnings per share (EPS) rose to ₦21.56 kobo, ₦14.43 kobo higher than ₦7.13 kobo achieved in FY ‘22, leading to a Price/Earnings Ratio (PE) of 1.66x at closing market price of ₦35.70 posted on Monday, 05 August 2024.
Zenith Bank Plc unaudited financial statements (UFS) for the half-year ended June (6M-2024) 2024 reveals an important development in the tier-1 Bank as we head towards it full-year 2024. The Bank importantly grew both Gross earnings (GE) and Net earnings (PAT) by 117.3% and 98.1%, respectively, compared to 6M-2023 numbers.
Notably, the GE settled at ₦2.10 trillion, only 2.34% shy of the total FY-2023 GE. The GE performance in the 6M-2024 was strongly driven by Interest Income (INC), which rose by 176.7% y/y to ₦1.15 trillion, and represented 54.7% of the total GE. Other contributors to the GE are Trading Income (37.9% of the GE), and net Fees and Commission Income (5.2% of the GE).
As noted above, INC was the chief driver of the GE, and itself was primarily driven by expansion in the Group’s credit advanced to customers. Markedly, the Group’s loans and advances to customers expanded by +140.3% y/y to ₦610.36bn. Additionally, we noticed that investment in government’s financial instruments such as treasury bills and bonds provided better returns in the period under review compared to numbers achieved in 6M ’23, amid high yields’ environment. For instance, treasury bills’ (NTBs) returns rose by 269.2% y/y to ₦261.31bn, representing 22.7% of the INC (vs 17.0% in 6M ’23). Investment in government and other bonds grew by 220.7% y/y to settle at ₦193.77bn, representing 16.9% of the INC (14.0% in 6M ’23). Note that within the period, the CBN’s Monetary Policy Committee (MPC) hike benchmark interest rate (Monetary Policy Rate (MPR) by 750 basis points (bps).
In view of the expansion in INC, cost heads equally expanded. Notably, Interest expense rose by 182.9% y/y to ₦434.36bn, driven by 429.0% y/y expansion in interest paid on borrowed funds, 75.8% y/y interest on time deposits, ands 162.0% y/y interest on current and savings accounts’ (CASA) deposits. Nonetheless, Net Interest income (NIC) grew by 173.1% y/y, leading to 696bps increase in Net Interest Margin at 34.03%. Furthermore, Operating expenses (OPEX) rose by 15.9%, mostly driven by AMCON levy (257.7% of OPEX), fuel and maintenance (15.2% of OPEX) and Information Technology (6.9% of OPEX). Elsewhere, impairment charges jumped by 99.7% to ₦434.36bn, owing to 71.9% increase in the Bank’s gross loans and advances to customers amid economic hardship. As such non-performing loan (NPL) ratio settled at 4.9% (vs 3.9% in 6M ’23).
Amid improvement in income heads, pre-tax profit rose by 107.5% to settle at ₦727.03 billion. Total tax expenses rose to ₦149.03 billion (following the increased effect of income, education and information tech taxes), representing 154.2% higher than 6M ‘23 number. Notwithstanding the increased pressure on tax expenses, Net income (PAT) grew by 98.1% to settle at ₦578 billion, compared to 6M ’24 number. With the improved PAT, computed 6M ’24 earnings per share (EPS) rose to ₦18.41kobo, ₦9.12kobo higher than ₦9.29kobo achieved in 6M ‘23, leading to a Price/Earnings Ratio (PE) of 2.08x at closing market price of ₦38.25 posted on Friday, 30 Sept. 2024.
The Group’s total assets rose by 35.4% to settle at ₦27.58 trillion compared to figure reported in FY-2023. Growth here was partly supported by 4.9% expansion in cash and cash equivalent, indicating a good liquidity state. Total liabilities also rose by 35.1% to ₦24.38 trillion. This increase was substantially bolstered by 29.4% rise in deposits from. With the faster increased in total assets compared to total liabilities, Shareholders’ fund rose firmly by 37.5% to ₦3.19 trillion when compared to ₦20.37 trillion reported in FY-2023.
The Board of Directors recommended an Interim Dividend of ₦1.00 per share of 50 kobo each, subject to deduction of appropriate withholding tax, and will be paid to shareholders whose names appear in the Register of Members as of the Company on Monday, 16 September 2024.
We have adjusted our target price on Zenith to ₦50.00 from ₦45.00 targeted for a 12-Month waiting period. Our target price of ₦50.00 now covers a waiting period of 6-Month, covering period up to March/April 2025 when FY-2024 numbers and dividend announcement would have been released. The target price of ₦50.00 represents 33.3% upside opportunity against the closing market price of ₦37.50 posted on Friday, 06 Sept. 2024. This presents an attractive entry opportunity for investors.
Zenith strong financial performance, valuation, and growth prospects make it a compelling investment opportunity. Given its Rights Issue price of ₦36.00 and a 52-week high of ₦47.35. Notably, Zenith has been a significant attraction for foreign portfolio investors, as evidenced by its substantial FPI inflows.
Other key investment considerations for Zenith Bank are capital gains opportunity where Zenith is distinguished for creating capital gains opportunity for investors from increased stock liquidity on the Exchange, enhancing your investors’ wealth, reliable dividend payouts where Zenith has a strong financial position with consistent dividend payouts, ensuring regular income for shareholders, sound corporate governance where the bank is led by an experienced and highly regarded management team committed to sound corporate governance and robust enterprise-risk management, enhanced shareholder value where Zenith is driven for expansion beyond Nigeria, including strategic international growth and IT infrastructure investments, leading to a stronger financial position and higher net income.
