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Zenith Bank: Impressive performance in profitability, amid pressure on Credit Loss

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Zenith Bank Plc for the half year ended June 30, 2017 reported growth across most line items, including gross earnings and profit, but showed significant increase in Impairment loss on financial assets.

The leading bank made a 30 per cent provision on its exposure to 9Mobile (formerly Etisalat Nigeria) which resulted in a surge in credit loss provision.

Zenith Bank’s Impairment loss on financial assets rose by 197.91 per cent to N42.4 billion in H1 2017 from N14.2 billion in H1 2016.

Gross earnings surged by 77.10per cent to N380 billion in H1 2017 from N214.8 billion in H1 2016, supported by impressive growth in interest income and non-interest income as the Group achieved Profit Before Tax (PBT) and Profit After Tax (PAT) of N92 billion and N75 billion respectively representing a stellar growth of 71 per cent and 112per cent over the same period of 2016.

Strong profitability was driven by robust core earnings generation and management cost control to deliver improved operating leverage and sustainable stakeholder value.

In spite of the macroeconomic challenges, Zenith Bank for the period under review delivered an attractive earnings profile, supported by increasing revenue and improving operating efficiency.

Consistent with its dividend payment, the bank paid shareholders   an interim dividend of N0.25 (same as previous year) – translating to payout ratio of 10.42per cent and a dividend yield of 1.04per cent.

While Net Interest Margins (NIMs) tightened by five per cent  due to the elevation in interest expense, the growth in both interest income and interest expense was an outcome of the current high yield environment.

As NII tightened by five per cent, Net Interest income gained 9.4 per cent to N138.96 billion from N127 billion in H1 2016 while Non-interest income gained 253.8 per cent to N118.18 billion as against N33.4 billion reported in prior half year of 2016.

Also from the income statement, Operating income closed the half year at  N214.7 billion from N146.2 billion in H1 2016.

Due to the currency devaluation, attendant inflationary pressures and Asset Management Corporation of Nigeria (AMCON) charges, operating expense increased by 47.8per cent.

However, in other comprehensive income, Zenith Bank’s recorded a loss of N4.88 billion (due to fair value movements on equity instruments and foreign exchange translation differences for foreign operations) compared to a gain of N30.21 billion in half year of 2016.

Zenith Bank strong growth in interest income was buoyed by impressive growth on interest on loans and advances to customers (35.21per cent) and interest income on treasury bills (+154.10per cent) – translating to annualized asset yield expansion of 207 basis points to 13.61per cent.

Despite the expansion recorded in asset yields, net interest margin contracted 43 basis points to 7.6per cent, as funding costs spiked by 320 basis points to 6.4per cent.

Breakdowns of the surge in interest expense (126.71per cent) revealed higher costs on borrowed funds (+14.55 per cent) and deposits – CASA (+46.85 per cent) and term deposits (+210.08 per cent) broadly reflective of the relatively higher interest rate environment.

The impressive growth in Non-Interest Income (NII) largely stemmed from strong fee income (22.97 per cent, due to growth in credit related fees, financial guarantees, E-banking fees, foreign exchange translation fees, asset management fees, and commission on agency fees), surge in trading income (driven by foreign exchange and Treasury bills trading income), and monumental growth in other income – due to a writeback of previous provisions amounting to N8.4 billion and foreign exchange revaluation gain of N5 billion.

Specifically, on the performance in second quarter of 2017, gross earnings grew significantly by 57.51 per cent quarter on quarter (q/q) (101.69 per cent).

In a deviation from the q/q decline in credit loss provision in Q1-17, asset quality deteriorated in Q2-17 with an additional provisioning of N34 billion (337.64per cent q/q), to increase total provisioning in the first half to N42 billion – equating to annualized cost of risk of 3.8per cent, an expansion of 230 basis points.

The provisioning relates to the bank’s exposure to the power sector – distribution companies (Ikeja & Eko Disco both in Lagos) and generating companies (Geregu, Shiroro and Egbin) – and oil & gas sector.

Total operating expenses rose by 47.67per cent to N122.56 billion in H1 2017 from N92.29 billion in H1 2016, broadly driven by a surge in operating expenses (85.77 per cent) – notably, the higher than expected growth in operating expenses stemmed from higher regulatory fees (AMCON), training and development, IT/E-business expenditures, and fuel and maintenance expense – and depreciation expenses (20.42per cent).

Stronger balance sheet despite drop in deposit, loans & advances

From balance sheet position, customers’ deposit dropped by 0.3 per cent to N2.97 trillion from N2..98 trillion in 2016 while gross loans & advances also dropped by 2.6 per cent to N2.3 trillion from N2.36 trillion reported in 2016, to leverage on 66.3 per cent loan to deposit ratio, 7.2 per cent below 71.3 per cent in H1 2016.

However, the Group’s total assets marginal gained four per cent to N4.9 trillion as against N4.7 trillion in 2016 financial year.

Shareholders’ funds gained 2.1 per cent to N719 billion in H1 2017 compared with N704.5billion in 2016.

The bank’s balance sheet as at half year of 2017 ending reveals that foreign exchange currency borrowings worth $593.80 million.

 In a bid to meet maturing foreign exchange currency obligations in 2017, the bank issued the second tranche of its $1 billion global Medium Term Note Programme established in 2014.

The programme was completed in May and the bank successfully raised $500 million (at a coupon rate of 7.37 per cent, a 113 basis points premium over the first tranche).

Key ratios

Zenith Bank’s key financial metric revealed that liquidity ratio of the group as at half year was 61per cent from 55.2 per cent in H1 2016, thus maintaining a highly liquid balance sheet which is in line with its operating strategy and higher than the regulatory minimum of 30per cent.

Furthermore, the Group’s strong fundamentals are exhibited through its Capital Adequacy Ratio (CAR) of 21per cent from 19 per cent which provides ample buffer above the regulatory minimum of 15per cent.

Capital base -predominantly made up of Tier 1 (core capital) which consists of mainly share capital and reserves created by appropriations of retained earnings

The Group also retains the capacity for risk asset creation given its loan to deposit ratio of 66per cent.

Following the cost pressure, cost to income ratio rose to 57.07per cent from 56.71per cent in half year of 2016.

Given additional classification of some Non-Performing Loans (NPLs), especially Oil & gas – upstream and downstream -, and general commerce, NPLs rose to 4.3 per cent in H1 2017 from three per cent in 2016 full financial year, still below the statutory guideline of five per cent.

Return on average assets(ROAA) hits 3.1 per cent in H1 2017 from 2.1 per cent in H1 2016 while Return on average equity ( ROAE) moved from 14.8 per cent in H1 2016 to  21.2 per cent in H1 2017.

Outlook and Prospects of Zenith Bank in 2017

The bank planned to continue to grow its retail business especially in liability generation. According to the bank, this will be achieved through the deployment of innovative products in mobile banking, internet banking and cards services.

The management of Zenith’s strategy to support the Federal government’s resolve to boost the agriculture sector in the country would no doubt create quite a number of opportunities in the areas of funding, job creation and indeed food security to Africa’s most populous nation.

The management drives for low cost and appropriately mixed deposit base to fund credit and money market transactions going forward.

More emphasis will be placed on manufacturing and the real sector by providing support to local production. This is expected to drive the self sustainability policy of the Federal Government.

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