Zenith Bank Scales CBN Tightening Measures, Records Growth in Top, Bottom Lines

Contrary to analysts’ expectations, Zenith Bank rose above the daunting challenges initiated by the global fall in crude oil prices, supported by tightening policies of the Central Bank of Nigeria (CBN) to a reasonable level of profitability in its financial year postings for 2014.
Gross earnings went up 14.8 per cent year-on-year (Y-o-Y); while profit after tax (PAT) went up 4.3 per cent during the same period.
Analysts at Cordros Capital agreed that Zenith Bank recorded positive growth in both top and bottom line notwithstanding Central Bank of Nigeria’s (CBN) numerous tightening policies in 2014 which tapered the industry’s earnings generation capacity.
Zenith Bank gross earnings rose to N403.3 billion, 8.6 per cent above their financial year 2014 projection of N371.5 billion, from N351.5 billion in financial year 2013.
This growth was achieved on the back of 39.1 per cent and 15.9 per cent. A yearly growth was also noticeable in non-interest income and interest income. The non-interest income was bolstered by two new line items; auction fee income (N3.0 billion) and foreign withdrawal charges (N4.9 billion) which accounts for 10.0 per cent of total fees and commission income.
A further breakdown of the interest income revealed that the growth was premised on the 46.0 per cent growth in income from loans and advances to customers (loans and advances grew 38.2 per cent Y-o-Y from N1.2 trillion to N1.7 trillion) as income from fixed income securities declined 21.5 per cent. Investment securities dipped 344.0 per cent Y-o-Y from N303.0 billion to N200.0 billion).
In the same vein, the bank’s profit before tax (PBT)12.8 per cent from N106.2 billion in 2013 to N119.8 billion 2014.
There was a moderation in 2014’s PAT. Analysts attributed it to the 51.0 per cent increase in interest expense, indicating the bank’s aggressive drive for deposit mobilization in 2014 amid stiff competition. This dwarfed the impressive growth in interest and non-interest income in 2014.
Consequently, the bank’s return on Average Equity (ROAE) and Return on Average Assets (ROAA) for 2014 tapered to 18.7 per cent and 2.9 per cent from 19.6 per cent and 3.3 per cent in FY:2013.
Zenith’s cost to income ratio remained relatively flat at 55.2 per cent in 2014, against the 55.7 per cent in 2013. This, obviously is against the backdrop of improved operating income as operating expenses (OPEX) spiked 11.2 per cent to N163.7 billion in 2014. The various CBN policies that have squeezed income have spurred the banks to invent new avenues to earn income to cover up for the lost interest income from the increase in Cash Reserve Ratio (CRR) on both public and private sector deposit in 2014. Although the Bank’s Cost of Funds inched higher to 4.4 per cent in 2014, from 3.4 per cent in 2013, on the back of 44.9 per cent Y-o-Y increase in interest expense on time deposits in 2014.
The 5-year senior unsecured US$500.0m Eurobond raised in the first half of 2014 provided the leeway for the bank to increase risk assets within the period under review. The bank’s loan to deposit ratio berthed at 68.2 per cent in 2014, against 55.0 per cent in 2013, 11.8 per cent below the CBN’s 80.0 per cent threshold.
The significant growth in risk assets is in tandem with the CBN policy to drive lending in the Nigerian economy. The bank’s robust risk management process provided more positive impacts as cost of risk moderated slightly to 0.8 per cent in 2014 from 0.9 per cent in 2013. Notwithstanding; the bank’s impairment charges rose 18.0 per cent to N13.1 billion from N11.1 billion in 2013.
A further breakdown of Zenith Bank’s impairment charges shows that overdraft accounts for 83.2 per cent and increased 35.5 per cent in 2014.
“We attribute the growth in the overdraft’s impairment charges to the recent developments in the oil and gas space as most operators may have challenges in meeting up with their obligations relating to the available credit line. In this light, we expect the bank to review policies around overdraft loans to the oil and gas sector to tame the growing trend in subsequent years”, said analysts from Cordros Capital.
Zenith’s Capital Adequacy Ratio (CAR) continued on the downward trend Y-o-Y to settle at 20.0 per cent (Basel II) in 2014, compared with the 26.0 per cent in 2013 and 29.7 per cent in 2012, traceable to the bank’s aggressive growth in risk assets relative to available capital.
The bank’s CAR is 4.0 per cent above the 16.0 per cent CAR regulatory requirement for Systemically Important Banks (SIBs).
Analysts therefore expect Zenith Bank to raise additional capital via Rights Issue before the end of 2015 to increase its ability to increase risks assets, hence increase interest income.
The Board of Directors has proposed a dividend of N1.75, as against the N1.70 in 2013), translating to a dividend yield of 9.2 per cent (highest in the banking industry) at N19.00 share price (06/03/2015).

Leave a Reply

Your email address will not be published. Required fields are marked *