Zenith Bank: Increase in non-interest income drive profits

By Kayode Tokede

Zenith Bank plc released its audited result and accounts for full year ended December 31, 2020 with significant increase in non-interest Income (NII) that drive growth in profits and dividend payout to shareholders.

The bank thus struggled to grow its interest and similar income following a low-yield business environment during the period.

The lender’s growth in profits was achieved through optimization of its net income on fees and commission, trading gains and other operating income that drive NII by 8 per cent.

Zenith bank in the period under review reported 12 per cent increase in net interest income that also contributed to profit in the year under review.

With 10 per cent increase in profit after tax, the group Earnings Per Share gained 10 per cent to N7.34 in 2020 as against N6.65  in 2019.

Nigerian NewsDirect gathered that the lender in 2020 financial year proposed a final dividend of N2.70 per share which in additiuon to the N0.30 per share as interim dividned amounts to N3.00 per share (2019: interim dividend of N0.30 per share and a final dividend of N2.50 per share).

The group in 2018 had proposed of N0.30 and a final dividend of N2.50 per share (December 31, 2017: interim; N0.25, final; N2.45) from the retained earnings account as at December 31, 2018.

The Group’s audited results for the period under review shows a stable performance in balance sheets position as customer deposits and gross loans advance by 25 per cent and 19 per cent to drive total assets by 34 per cent as at December 31, 2020.

The solid financial performance for the period affirms Zenith’s Bank industry leadership position in profits, resilience and consistency in achieving its strategic objectives despite the challenging business environment.

Zenith Bank offers its clients a wide range of corporate, investment, business and personal banking products and solutions. It is one of the biggest and most profitable banks in Nigeria.

Increase in NII boost profits

Zenith Bank’s for the period under review reported gross earnings gained five per cent to N696.45billion in 2020 as against N662.25billion reported in 2019.

The financial institution reported Interest and similar income of N420.8billion, one per cent increase from N415.56billion reported in 2019, while Interest and similar expense dropped by 18 per cent to N121.13billion in 2020 from N148.53billion reported in 2019.

This, translates into net interest income that gained 12 per cent to N299.68billion in 2020 as against N267.03billion in 2019.

Continuing the trend during the year, Non-Interest Income (NII) gained 8 per cent to N251.75billion in 2020 compared to N231.83billion in 2019.

Also, while fees and commission income tumbled to N79.3billion in 2020  from N100.1billion in 2019, as non-interest income growth was supported by a surge in trading income (mainly on T-bills) to N121.8billion (from N117.8billion).

Notably, electronic banking fees tumbled from N42.5billion to N27.1billion amid regulatory changes and a reduction in transaction volumes due to the lockdown.

However, this was offset by a surge in foreign currency gains and trading income, which surged to N50.7billion from N14.2billion in 2019.

Expectedly, impairment charges printed a 64.5per cent increase to N39.5billion, driving Cost of Risk (COR) from 1.1 per cent  in  2019 to 1.5 per cent.

Total operating expenses (OPEX) gained 10 per cent to N256.03billion in 2020 from N231.83billion reported in 2019 , as the bank continued to focus on cost management in the face of weak income growth.

OPEX was driven mainly by ICT charges (N20.4billion vs N9.8billion), AMCON, NDIC (due to deposit expansion), fuel & maintenance, license, registration, and subscription-related expenses.

Consequent on the Opex growth relative to operating income growth, cost-to-income ratio settled lower at 50 per cent in the year under review relative to 48.8per cent in the prior year.

For the period year ended December 31, 2020, the Zenith Bank Group’s profit before tax gained five per cent to N255.86billion in 2020 as against N243.29 billion reported in 2019 while profit after tax rose by 10 per cent from N208.84billion in 2020 compared to N230.57 billion reported in 2020.

With growth in profits, Zenith Bank’s Return on average equity (ROAE) closed 2020 at 22.4 per cent as against 23.8per cent reported in 2019 while Return on average assets (ROAA) dropped  to 31.per cent from 3.40per cent in 2019.

The group net Interest Margin (NIM) dropped to 8.2 per cent in 2020 as against 7.90 per cent in 2019, as cost of funds dropped from three per cent in 2019 to 2.1 per cent in 2020.

Policy drives gross loan &advances to customers

The Group closed the period with double-dight increase in total assets amid growth in gross loans and advances to customers and customers deposits.

The total assets of Zenith bank grew by 34  per cent to N8.48trillion in 2020 from N6.35trillion reported in full year ended December 31, 2019.

The Central Bank of Nigeria (CBN) had mandated commercial banks to lend 65 per cent of the deposit to support real sectors of the economy and Zenith bank in 12 months grew gross loans by 15 per cent to N2.92 trillion over N2.46trillion reported in 2019.

The group’s customers’ deposits grew by 25 per cent to N5.34 trillion from N4.26 trillion recorded in 2019, a reflection of increasing share of the industry’s deposits and customers’ confidence in the Zenith brand.

Zenith bank’s cash and balances with the CBN jumped 70per cent to N1.6trillion, of which over N1.3trillioon or 83.6per cent represents mandatory and special reserve deposits with the CBN.

This is unsurprising considering a move by the CBN to begin to issue special bills to banks in Q4-2020 as a strategy to manage liquidity as well the apex banks liabilities to deposit money banks going forward.

Furthermore, Zenith Bank’s total equity rose by 19 per cent to N1.12reillion as at December 2020 from N941.9 billion reported in 2019.

The financial institution continued to maintain a disciplined and prudent approach to loan growth in line with its risk management framework.

The Group Non-Performing Loans (NPL) ratio remained low at 4.29 per cent in 2020 from 4.30 per cent in 2019, below five per cent threshold required by CBN.

Zenith Bank’s Capital Adequacy Ratio (CAR) closed 2020 at 23per cent from 22 per cent in 2019, above 16 per cent required by regulatory body being of the Symmetrically Important Banks (SIBs).

However, Loan-to-Deposit (LDR) and liquidity ratio of 54.7per cent and 66.2per cent reflects a cautious approach to risk-asset creation in view of the fragility of the macroeconomic environment.

This gives headroom for providing support to businesses while creating risk assets opportunities in line with our credit risk management framework.

 Points to consider

Nigerian NewsDirect ,however,  retain a BUY rating on Zenith bank at the current price of N26.3/share, buoyed by operational efficiency which was reflected in the reduction in cost of funds, massive cheap deposits, and resilient interest income numbers.

In 2021, interest income from the huge deposits with the CBN should support earnings considering the special bills offering from the CBN which was executed at 0.5per cent.

For context, we expect PAT to remain stable and well above N200billion in 2021, consolidating its industry position as the most profitable bank.

Again, Zenith bank’s earnings stability continued to more than offset pressure on CAR, as observed in the 2020 numbers.

Accordingly, our valuation assumptions feed on the lender’s robust balance sheet position, earnings stability, resilient margins, and dividend consistency.

Adjusting our valuation assumption for higher country risk premium as well as risk-free rate, we revised our TP to N30.4/share with a 15per cent upside potential compared to current price.