Zenith Bank, one of Nigeria’s leading financial institutions, has reported impressive financial results for the first nine months of 2023.
The bank recorded a remarkable pre-tax profit growth of 149.05 percent year-over-year, reaching a total of N505.036 billion.
This figure represents the highest pre-tax profit in Nigeria for this period.
One of the key factors contributing to this outstanding performance was the significant foreign exchange gains resulting from the devaluation of the Naira.
The Naira’s value decreased from N461.1/$ at the end of 2022 to N776.8/$ by September 2023. This devaluation led to substantial gains for Zenith Bank, with foreign exchange gains amounting to N378.122 billion over the nine-month period.
Notably, in the second quarter alone, the bank recorded foreign exchange gains of N354.376 billion.
However, the bank experienced a decrease in foreign exchange gains in the third quarter, amounting to N22.534 billion.
Despite this moderation, the overall performance for the nine-month period remained impressive.While the second quarter saw peak quarterly gross earnings and post-tax profit, contributing significantly to the bank’s overall performance, there are other factors to consider.
Zenith Bank’s success can also be attributed to its strong management, efficient operations, and strategic decision-making.
The bank’s exceptional financial results highlight its ability to navigate the challenging economic landscape and capitalise on opportunities.
Zenith Bank continues to demonstrate its position as a leading player in the Nigerian banking sector, delivering value to its shareholders and contributing to the country’s economic growth.
Interest income increased by 72 percent to N670.932 billion, but interest expenses grew more sharply by 137 percent to N255.704 billion.
Zenith Bank also provided some context to their recent earnings explaining that it was largely due to new loans as well as forex revaluation.
“The growth in profit similarly is attributable to the twin effects of the improvement in interest and non-interest income. Interest income increased because of the growth in risk assets as well as the effective pricing thereon. The non-interest income growth is largely driven by the revaluation gain due to the unification of exchange rates during the year.”
Despite this, net interest income rose by 47 percent to N415.228 billion. However, a 16.51 percent decline in net interest income after impairment charges and a 10 percent drop in net interest margin to 5.6 percent were noted.
A spike in loan impairment charges to N209.999 billion, a 466 percent year-on-year increase, significantly affected the cost of risk, which jumped by 323 percent to 5.5 percent, indicating higher credit risk and impacting the net interest income margin.
The bank explained that the rising loan impairment was strategic as it preferred to take the hit on loan losses now that profits are at all-time highs.
“Impairment levels increased due to the deliberate incremental provisions necessitated by our conservative approach towards the heightened risk environment and the creation of a counter-cyclical buffer needed to deal with any impending volatility of exchange rates.
“This caused the cost of risk to deteriorate from 1.3 percent in Q3 2022 to 5.5% in Q3 2023, however, this is an improvement from Q2 2023 where cost of risk printed at 8.8 percent because of prudent management of our risk assets.”
However, Zenith Bank’s effective credit quality management also seems to be working as evidenced in the reduced non-performing loan ratio to 3.8 percent and a substantial decline in loan impairment charges in Q3 to N2 million.
Additionally, the bank demonstrated strong shareholder returns, with a 95 percent growth in return on average equity to 35.1% and a return on average assets of 3.5 percent.
These figures highlight the bank’s efficiency in profit generation from shareholders’ funds and assets.
Operational expenses were well-managed, evidenced by a 32 percent year-on-year decrease in the cost-to-income ratio to 37.8 percent. This control is crucial for sustaining favourable returns to shareholders.
Zenith Bank’s earnings per share (EPS) saw significant growth, reaching N13.82 for the nine months, a 149.05 percent increase year-on-year, and a trailing twelve-month EPS of N14.17.
Q3 alone registered an EPS of N3.29, marking a 107 percent growth over the period. With a year-to-date share price gain of 38.73 percent, earnings outpace the share price, driving its upward trend.
The Central Bank of Nigeria’s directive limiting the use of FX gains for dividends and expenses tempers expectations for higher returns in 2023. Still, Zenith Bank’s solid dividend history and an interim dividend of N0.50 for H1 2023 keep investor interest alive.
Currently, Zenith Bank’s stock offers an attractive dividend yield of 10.21% and the highest EPS among the five Tier-1 banks.
Its trailing twelve-month P/E of 2.16x is below the Tier-1 banks’ average of 2.37x, and a price-to-sales ratio of 0.83 suggests a market perception of undervaluation.
Despite these promising valuation metrics, reversing the decline in net interest income remains crucial for Zenith Bank, especially as FX gains, a key bottom-line driver in 2023, diminish.