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Zenith Bank Plc: A profitable outing

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Introduction

Our analysis of Zenith Bank’s 2023 recent annual report shows that the year was quite a profitable one for the bank. Not only did the bank record a commendable growth in its turnover, it was also able to maintain such momentum to its profit.

As a direct fallout, the bank’s profitability ratios (such as profit margin, return on assets, return on equity, net interest margin and pre-tax profit per employee) remained high enough for the bank to remain relevant. It is important to note that the bank is also doing very well in its core banking operations.

Growth indices

For its 2023 financial year, the bank recorded a very commendable 125.4 percent growth in its turnover (inclusive of interest and discount income, and income from non-banking operations). Such turnover rose to an all-time high of N2.13 trillion from N945.6 billion in the preceding year.

It is worthy of note that while the bulk of the bank’s turnover was contributed via interest and discount income, it also stepped up the tempo of its non-core banking operations during the course of the year and earned significantly more money from there.

Pre-tax profit growth rate followed an even more commendable pattern, growing much more steeply as compared to the growth recorded in the prior year. Profit before tax obligations for 2023 stood at N795.9 billion, up from N284.7 billion in the erstwhile year, and translating into a 179.6 percent growth rate. After-tax profit followed the same pattern as pre-tax profit did, growing commendably by 202.3 percent over the preceding year’s level.

Total assets deployed by the bank for the 2023 year improved to a higher level of N20.4 trillion, about 65.8 percent higher than the N12.3 trillion assets deployed in December 2022, while shareholders’ funds advanced to N2.3 trillion from N1.4 trillion.

Profitability ratios

In all ways, the 2023 financial year was a profitable one for Zenith, as it recorded a marked improvement in almost all of its profitability ratios.

First, the bank did well in the execution of core banking operations, as shown by its net interest margin. Zenith recorded a net interest margin of 64.3 per cent. This interest margin, although lower than what the bank recorded in the preceding year, was on par with the industry average for 2023. This lower 64.3 percent net interest margin happened despite the increasing gap between the bank’s lending rate (which grew to 17.5 percent in 2023 from 13.5 percent in December 2022) and its deposit rate (which grew to 2.7 percent from 1.9 percent).

Profit margin also grew to 37.3 percent in 2023 from 30.1 percent in December 2022. What this means is that for every N100 earned by the bank in the course of the year, N37.30 made it to the profit position. This is as compared to N30.10 for the year preceding 2023.

Return on assets (ROA) also recorded an improvement. ROA grew to 3.9 percent in 2023 from 2.3 percent in December 2022. Analysis shows that every N100 worth of Zenith’s assets contributed N3.90 to its pre-tax profit in 2023, up from N2.30 in 2022.

For every N100 equity deployed, the bank made an after-tax profit of N29.10, up from N16.20 in the preceding year. Thus, return on equity for the year was also better than that of the prior year.

Asset quality

The proportion of Zenith’s gross loan stock that became classified in 2023 declined by increasing to 7.6 per cent from 5.8 per cent in 2022. Meanwhile, loan loss reserves for 2023 could cover only 20.4 percent of Zenith’s classified loans.

For 2023, the bank was not as careful to limit the portion of its equity stock that would be wiped out were its classified loans to become totally irrecoverable. Classified loans as a portion of shareholders funds stood at 23.4 percent in 2023, higher than 17.2 percent in 2022.

Staff matters

The bank did very well in matters regarding its employees for the year ended December 31 2023. Pre-tax profit per employee grew to N97.47 million on the average, better than the N35.25 million employees contributed on the average to the bank’s pre-tax profit in 2022.

The bank was, however, generous enough to compensate its employees more in 2023 than it did in December 2022. Average staff cost rose to N15.23 million from N10.69 million within the course of 12 months. This means that there was a N4.54 million addition to what an employee earned (on the average) between December 2023 and December 2022.

Despite the fact that it upped its staff costs, Zenith succeeded in deflating such staff costs as a proportion of income earned. Staff costs as a portion of turnover decreased to 5.8 percent in 2023 from 9.1 percent in December 2022.

Other ratios

Zenith’s equity (a company’s primary and cheapest source of funding) could finance 32.9 percent of the loans and advances it gave out to borrowers, down from 33.4 percent recorded in the erstwhile year.

Also, at 0.6 times, the current ratio was not on par with the industry average for 2023. What this means is that for every N1.00 of short-term obligations, the bank had only 60 kobo in short-term assets, and was not completely able to meet short term debts from short term assets.

Having a debt to equity ratio of 7.8 shows that the bank is using N7.80 of liabilities in addition to each N1.00 of stockholders’ equity. In other words, the bank is using N8.80 of total capital for every N1.00 of equity capital.

Return on equity

Another performance ratio in which Zenith did well was in its return on equity (ROE) of 29.9 percent. Zenith’s ROE for 2023 stood at 29.1 percent.

Return on assets

This was one of the ratios in which Zenith outperformed its peers. Its ROA was 3.9 per cent, higher and better.

Pre-tax profit margin

Although Zenith Bank was not able to grow its gross earnings and pre-tax profit as fast as its peers, it was however better able to translate its turnover into profit. For the 2023 financial year, pre-tax profit margin (which measures a company’s ability to squeeze as much profit as is possible from turnover) for Zenith Bank was 37.3 percent.

Conclusion

On its own, in a stand-alone analysis, Zenith Bank is doing quite well and this should be commended. It remains to be seen, however, if Zenith and UBA will be star performers in the banking industry for 2023, or if 2023 was a generally good year for all Nigerian banks.

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FCMB Plc: Improved profitability parameters

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Introduction

FCMB Plc mostly recorded an improvement over the preceding year’s results in terms of turnover and profit, and this improvement carried over to its profit. As a result, the bank recorded better profitability ratios than that of the prior year. Profit margin, return on assets, return on equity, and other important profitability parameters improved.

However, the bank did not compete too favourably when its results are compared with its competitors’ results.

Growth indices

A look at the bank’s growth indices over the past two years shows that the bank recorded consistent growth. For its 2023 financial year also, the bank recorded an 82.6 percent increase in its turnover (inclusive of interest and discount income, and income from non-banking operations). Such turnover grew to N516.8 billion from N282.9 billion in the preceding year. This 82.6 percent growth rate is as compared to a lower 33.5 percent growth rate that was achieved in 2022.

Pre-tax profit growth rate followed an even steeper pattern, as the bank recorded a much higher profit in the year under review. Profit before tax for the year stood at N104.43 billion as compared to a profit before tax of N36.57 billion in the prior year. This translates to a 185.6 percent growth rate.

After tax profit for the year was also a steep growth over the after-tax profit of the preceding year, growing to a whopping N93.02 billion from a profit of N31.12 billion in the erstwhile year.

Total assets deployed by the bank for the 2023 year was N4.41 trillion, about 47.9 percent higher than the N2.98 trillion assets deployed in 2022, while shareholders’ funds grew to a figure of N460.7 billion. Growth rate of equity for the year was therefore 67.0 percent, as such shareholders funds grew from a figure of N275.9 billion in the erstwhile year.

Profitability ratios

The 2023 financial year was a progressive one for FCMB in terms of profitability ratios, as it recorded an improvement in almost all of its profitability ratios. First to achieve a progression was the profit margin of the company. For the year, the bank had a profit margin of 20.2 percent in 2023, up from a profit margin of 12.9 percent in 2022. What this means is that for every N100 earned by the bank in the course of the year, N20.20 accrued to it as a profit. This is as compared to a profit of N12.90 and a profit of N10.70 in the two years preceding 2023.

Also to record a progression was return on assets (ROA). ROA for the year stood at 2.4 percent in 2023, as compared to 1.2 percent in 2022. This means that the bank made a pre-tax profit of N2.40 from every N100 worth of assets deployed for the 2023 review year, as compared to a profit of N1.20 in 2022.

As for return on equity (ROE) for the 2023 financial year, FCMB made an after-tax profit of N20.20 for every N100 worth of equity employed, higher and better than the profit of N11.30 made in 2022.

FCMB did not do as well in the execution of core banking operations in 2023 as it did in 2022, as shown by its net interest margin, which slowed down to 49.9 percent. This 49.9 percent net interest margin is as compared to a higher 55.6 percent net interest margin in the preceding year. This result came to be despite the slightly increasing gap between the bank’s lending rate (which grew to 19.4 percent in 2023 from 18.4 percent in 2022) and its deposit rate (which also increased to 5.3 percent in 2023 from 4.7 percent in 2022).

Classified loans

FCMB’s proportion of classified loans (to gross loans and advances) was high and worse compared to competitors.

Asset quality

The proportion of FCMB’s gross loan stock that became classified in 2023 declined by growing to 4.3 percent from 3.9 percent in 2022. The proportion of classified loans is still low enough to be considered safe.

Meanwhile, the bank’s cover for such classified loans was a very high 109.7 percent, meaning that the bank had complete cover for its bad loans. It is also worthy of note that such classified loans would erode around 18.2 percent of the bank’s equity were they to become totally bad and irrecoverable. This is about the same level as it was in the prior year.

Other ratios

At 0.2 times, current ratio was very low and definitely not on par with the industry average for 2023. What this means is that for every N1.00 of short-term obligations, the bank had only 20 kobo in short-term assets, and was not completely able to meet short term debts from short term assets.

A debt-to-equity ratio of 8.6 means that the bank is leaning more on debt to finance operations rather than equity, but less so than it did in 2022. The upside is that when debt is managed properly, the returns are usually good.

Conclusion

FCMB’s result for the year cannot in and of itself be faulted. The bank, however, has a little bit more work to do to compete well against other banks.

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NASCON Allied Industries Plc: A leap forward

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Introduction

Our analysis of NASCON Allied Industries Plc’s current financial report shows that it had a good year in 2023. It was able to step up the level of its business activities as shown by a growing turnover base. It was also able to increase profit during the course of the year. Profitability ratios for the year were a progression over the preceding year’s. Profit margin improved, as did return on assets, return on equity, and pre-tax profit per employee.

Growth indices

For its 2023 financial year, NASCON recorded a measure of growth in all of its major parameters. First to grow was the company’s gross earnings. Gross earnings for the year stood at N80.83 billion, 37.5 percent higher than the N58.79 billion recorded in the preceding year. This 37.5 percent growth rate is as compared to a higher growth rate of 76.7 percent in 2022.

Because direct costs grew at a slower pace than turnover did, gross profit grew by as much as 80.6 percent to N44.32 billion. After deducting operating expenses from the gross profit and adding other income (including interest income), NASCON was left with a pre-tax profit of N20.59 billion, a whopping 146 percent higher than the N8.37 billion pre-tax profit recorded in the erstwhile year. This 146 percent growth rate is as compared to a pre-tax profit growth rate of 97.4 percent in the preceding year.

After-tax profit (which was also the same as distributable profit) grew over the preceding year’s by as much as 151 per cent to N13.73 billion.

Total assets for the year stood at N83.59 billion, up from N55.53 billion in 2022 and translating into a 50.5 percent growth rate. Total liabilities also grew by 53.8 percent to N56.12 billion from N36.49 billion while shareholders’ funds grew by 44.3 percent to N27.47 billion from N19.04 billion in the erstwhile year.

Profitability ratios

For the year, operating margin (which calculates what proportion of turnover is used to finance operations) was 29.3 percent, a little higher and therefore worse than the 25.8 percent that was recorded in 2022. What this means is that the probable margin for NASCON to be profitable reduced slightly during the course of the year.

Despite this, the profit margin for the year increased. Profit margin for 2023 stood at 25.5 percent, higher than 14.2 percent in the preceding year. What this means is that N25.50 made it to the profit position for every N100 earned in 2023, up from N14.20 in 2022.

Return on assets (ROA) followed the same pattern. ROA for the year increased to 24.6 percent from 15.1 percent in 2022, meaning that every N100 worth of assets deployed contributed N24.60 to the pre-tax profit for the year, higher than the N15.10 recorded in 2022.

Also, return on equity (ROE) grew to 50.0 percent from 28.7 percent, meaning that every N100 worth of equity employed contributed a massive N50.00 to the after-tax profit in 2023, up from N28.70 in the prior year.

Our examination of this company’s profitability ratios shows that the company recorded quite a profitable year in 2023, which was not the case for many other manufacturing companies in Nigeria.

Staff matters

In terms of staff matters, the conglomerate did quite well for the year ended December 31 2023. On the average, each employee contributed N30.59 million to the company’s pre-tax profit, commendably up from N14.19 million in the prior year.

To this end, NASCON reciprocated by increasing its staff cost per employee. On the average, wages and salaries earned by each staff increased to N5.59 million during the course of the year, up from N4.04 million in the preceding.

It is however worthy of note and laudable that despite increasing average staff costs, the company did not actually put itself out more than was necessary. Staff costs as a proportion of turnover was about 4.6 percent.

Other ratios

For the year, NASCON’s short-term assets increased to N67.4 billion while its short-term liabilities increased to a collective N49.7 billion. The interplay between these two had an upping effect on its current ratio. At 1.4 times (higher than 1.3 in the preceding year), current ratio was on par with industry standards. What this means is that for every one Naira of short-term obligations, the company had N1.40 in short-term assets, and was more than able to meet obligations as at when due.

The company had a debt-to-equity ratio of 2.0 and this shows that the company is using N2.00 of liabilities in addition to each N1.00 of stockholders’ equity. In other words, the company is using N3.00 of total capital for every N1.00 of equity capital.

NASCON Vs Dangote Sugar: NASCON better

Not only is NASCON’s 2023 annual results laudable in its own stead; the company’s results also competed very well against competitors in the food/beverages & tobacco sector for the 2023 FY. We compared its results with that of its sister company, Dangote Sugar (both companies are subsidiaries of Dangote Industries), and NASCON came out on top, even though it is the smaller of the two companies in terms of volume of sales.

Turnover growth rate

For the 2023 financial year, Dangote Sugar had a turnover growth rate of 9.5 per cent, as compared to NASCON’s turnover growth rate of 37.5 percent for the same period under review. Analysis shows that NASCON was the winner in this respect.

Pre-tax profit growth rate

While Dangote Sugar had a negative pre-tax profit growth rate of 230.8 percent (meaning that pre-tax profit dipped instead of growing), NASCON had a positive 146 percent growth rate. NASCON was thus the winner in this respect.

Profit margin and returns

For the 2023 financial year, pre-tax profit margin (which measures a company’s ability to squeeze as much profit as is possible from turnover) for Dangote Sugar was negative 24.3 percent, worse than NASCON’s pre-tax profit margin of 25.5 percent.

Analysis shows that while every N100 worth of equity deployed by Dangote Sugar led to an after-tax loss of N88, such N100 equity deployed earned NASCON N50 as after-tax profit.

Also, ROA for Dangote Sugar was negative 17.8 percent, down from a positive figure of 16.7 percent in the prior year. This means that of every N100 worth of assets deployed by Dangote Sugar, there was a resultant N17.80 loss. Meanwhile NASCON recorded a N24.60 pre-tax profit from every N100 worth of assets employed.

NASCON was thus the winner in terms of profit margin, return on assets and return on equity.

Conclusion

In an operating environment where most companies recorded either negative or slowed down profitability ratios, NASCON is one of the few exceptions. Its ability to not only generate sales but also to maximise profits for the 2023 financial year is indeed commendable.

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Honeywell Flour Mills Plc: A tough year

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By Folakemi Emem-Akpan

Introduction

Honeywell Flour Mills Plc went the way of most other Nigerian companies in 2023, recording lower turnover. It went one step further and recorded downright end of the year losses. Because of the losses, the company did not have good profitability ratios and seems to be floundering. All in all, it was a tough year for the company.

Growth indices

Honeywell followed the general rule of earning more income in 2023 than it did in 2022. The growth in gross earnings, at 8.0 percent, was however lower than most other companies recorded. Gross earnings stood at N147.3 billion, a little higher than N136.4 billion in the prior year. Even though the company was careful to curtail cost of sales, it couldn’t quite do the same for operating expenses (inclusive of advertising and promotion, distribution, administrative and interest expenses). These grew much faster collectively in 2023 than in 2022.

For the second year in a row, Honeywell recorded a loss rather than a pre-tax profit. Loss before tax obligations for 2023 stood at a staggering N8.9 billion, a deeper loss than the N170 million pre-tax loss recorded in the prior year. After-tax loss was N260 million for the 2023 financial year, still a loss, but better than the N980 million loss recorded in 2022.

Total assets deployed by the company for the 2023 year grew to N165 billion, 11 per cent more than the N148.7 billion assets deployed in 2022. Meanwhile, shareholders’ funds declined by 27.5 per cent to N32.0 billion in the review year.

Profitability ratios

Not only did Honeywell record losses instead of profitability on a stand-alone analysis basis for the 2023 financial year, all parameters also showed a regression when compared to its preceding years’ result. First to achieve a regression was the profit margin of the company. Instead of a profit margin, there was a loss margin of 6.0 percent, meaning that for every N100 earned by the company in the course of the year, N6.00 of it translated to loss. This is as compared to a loss of 10 kobo in 2022.

Also to record a decline was return on assets (ROA). Loss on assets was 5.4 percent, as compared to a loss on assets of 0.1 percent in the erstwhile year. For the 2023 financial year, Honeywell deployed equity valued at N32.9 billion and for every N100 equity deployed, the company made an after-tax loss of 78 kobo.

The operating margin (which measures what proportion of turnover a company spends on operations and which must be kept as low as possible without compromising standards) was one of the reasons for the company’s bad results for the year. This is because such operating margin was 6.9 percent, higher and worse than the 5.2 percent recorded in the prior year.

Staff matters

As regards staff matters, pre-tax loss per employee stood at N10.9 million on the average. This is as compared to the N204 million pre-tax loss employees contributed on the average to the company’s pre-tax loss in 2022.

Average staff cost then increased significantly to N8.84 million from N5.99 million within the course of 12 months. This means that there was a N2.85 million addition to what an employee earned (on the average) between 2023 and 2022.

Perhaps, because it increased its staff costs, Honeywell did not succeed in deflating its staff costs as a proportion of income earned. Staff costs as a portion of turnover grew to 4.4 per cent in 2023, higher than 3.6 percent in 2022.

Other ratios

At 0.9 times, Honeywell’s current ratio was a little lower than the industry average for 2023. What this means is that for every N1.00 of short-term obligations, the company had 90 kobo in short-term assets, and was not fully able to meet short term debts from short term assets.

Having a debt-to-equity ratio of 4.0 shows that the company is using N4 of liabilities in addition to each N1.00 of stockholders’ equity. In other words, the company is using N5.00 of total capital for every N1.00 of equity capital, higher than it did in 2022.

Honeywell Vs Flour Mills: Still a loss

We have established that Honeywell did not improve its lot when its results are compared on a year on year basis. We can also establish that Honeywell did not compete favourably against other companies in the flour milling business for the 2023 FY. A comparison against Flour Mills buttresses this point.

While Flour Mills is easily the bigger of the two companies (in fact, it is the parent company of Honeywell), a bigger size does not automatically translate into better profitability. For the 2023 review year, Flour Mills was also the clear leader in terms of performance. Of six profitability ratios examined, Flour Mills led in all.

Turnover growth rate

For the 2023 financial year, Flour Mills had a turnover growth rate of 32.8 percent, as compared to Honeywell’s turnover growth rate of 8 per cent for the same period under review. Analysis shows that Flour Mills was the winner in this respect.

Pre-tax profit growth rate

For the year, Flour Mills’ profit before tax grew by a mere 1.5 percent. Yet, this was much better than the 5,074 percent decline Honeywell recorded. However, it is also important to note that while Flour Mills witnessed an actual growth, Honeywell had a pre-tax loss of N8.9 million.

Between turnover and profit

For the 2023 financial year, pre-tax profit margin (which measures a company’s ability to squeeze as much profit as is possible from turnover) for Honeywell was actually a pre-tax loss margin of (6.1) percent. Flour Mills, on the other hand, had a better pre-tax profit margin of 2.6 percent.

Return on equity

Flour Mills led its peers in terms of return on equity (ROE), recording an ROE of 13.1 per cent. Analysis shows that while every N100 worth of equity deployed by Flour Mills earned it N13.10 in after-tax profit, such N100 equity deployed earned Honeywell 78 kobo as after-tax loss.

Return on assets

ROA for Flour Mills was 3.7 percent, down from 5.9 percent in the prior year. This means that of every N100 worth of assets deployed by Flour Mills, N3.70 accrued to it as pre-tax profit while Honeywell recorded a N5.40 pre-tax loss from every N100 worth of assets employed.

Pre-tax profit per employee

For the 2023 financial year, Flour Mills recorded a pre-tax profit per employee of N6.72 million, much better than Honeywell’s N10.9 million pre-tax loss per employee.

Conclusion

Honeywell’s loss for its 2023 financial year shows how events beyond a company’s control can have an effect, either negative or positive, on its bottom line. It is clear that the economic recession Nigeria has been experiencing had a severely limiting effect on Honeywell’s revenues and performance. It remains to be seen what the 2024 FY will hold for the company.

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