Despite a jump of 203 per cent in impairment charges, Zenith Bank still recorded a growth of 37 per cent in profit after tax for the year ended December 31, 2017, writes Goddy Egene
When the banking sector closed last year as the best on the Nigerian bourse last year, it was driven by investorsâ€™ high demand for banking stocks.
Many investors took position in the banking stocks with the hope that banks will post improved result for 2017 financial year and declare higher dividends. Their calculations have been proved right going by the results so far released by three banks-Zenith Bank Plc, Guaranty Trust Bank Plc and Stanbic IBTC Holdings Plc. However, among the three Zenith Bank Plc dividend is the highest in terms of yield.
Although Zenith Bank Plc and GTBank are paying a total dividend of N2.70 apiece, the dividend yield of Zenith Bank Plc is 8.8 per cent while that of GTBank Plc is 5.3 per cent. In all, Zenith Bank Plc, with its full year 2017 results clearly affirmed its position as the largest Tier-1 bank in the country.
The bankâ€™s audited accounts presented to the Nigerian Stock Exchange (NSE) showed that its gross earnings rose by 47 per cent from N508 billion in 2016 to N745.19 billion in 2017. The bank also demonstrated its ability to take the right actions and make the right choices in its assets and liability management strategies culminating in a 23 per cent increase in interest income from N384.6 billion in 2016 to N474.6 billion for the year ending December 31, 2017.
A careful analysis of the results showed that the bank was able to strategically switch assets in favour of high yielding asset classes and was also able to optimally price its assets and liabilities in a high yield environment.
Accordingly, non-interest income also jumped by 119 per cent from N123.4 billion as at December 2016 to N270.6 billion driven by the bankâ€™s ability to take advantage of its strong foreign currency liquidity to generate income.
However, provision for impairment loss on financial assets soared from N32.350 billion to N98.227 billion in 2017. The huge provision is not unconnected with its exposure to 9 Mobile. The telecommunications firms is indebted to the tune of $1.2 billion to a consortium of banks with Zenith Bank Plc having the highest of $262 million and N80 billion.
Despite the huge provision, Zenith Bank Plc end the year with a profit before tax of N203.461 billion, showing an increase of 29 per cent from N156.748 billion, while profit after tax rose grew faster by 37 per cent to N177.933 billion, compared to N129.652 billion in 2016.
Based on the improved bottom-line, the board of directors of the bank has recommended a final dividend of N2.45 per share to bring the total dividend to N2.70, having paid an interim dividend of 25 kobo last year. The dividend is higher than the N1.02 paid the previous day.
Zenith Bank posted an asset base of N5.6 trillion, an increase of 18 per cent over the N4.74 trillion recorded for the same period in 2016. An analysis of the assets showed that loans and advances fell from N2.289 trillion to N2.100 trillion. However, customersâ€™ deposits improved from N2.983 trillion to N3.437 trillion in 2017.
Zenith Bank has continued to maintain a solid and high-quality capital position with a capital adequacy ratio at 27 per cent, well above the statutory requirement of 15 per cent, effectively providing room for further growth and strong and consistent dividend payout.
The bank has also maintained an excellent liquidity position with a liquidity ratio of 70 per cent, remaining strong and well above the regulatory requirement of 30 per cent.
Commenting on the results, market analysts said this was a show of resilience and demonstration of the ability of the bank to innovate and create impressive value from the resources available to it.
â€œWe note further that Zenith achieved this excellent financial performance, despite adopting a very conservative approach to recognising potential losses in its risk asset portfolio,â€ one analyst said.
On their part, analysts at FBN Quest said final dividend of N2.45 per share is higher than their N1.77 forecast and implies a yield of 7.9 per cent.
â€œDespite the marked rise in provisions, we expect the broad positives in the results to be paid some attention, mainly the better-than expected non-interest income line. In addition, a N35billion specific impairment taken on a gross loan portfolio of N95 billion for the Communications category appears sufficient to us as far as Zenithâ€™s 9mobile exposure is concerned. Going forward, the key themes for the banks in 2018 will be the implementation of IFRS 9 and the potential implications for cost-of-risk and Capital Adequacy Ratio (CAR). Although we expect a slight uptick in cost-of-risk, we believe that the impact will be modest for tier 1 banks like Zenith. Following the tightening of yields on government securities, we would like to see banks guiding to stronger loan growth for 2018 to compensate,â€ they said.
Elevated Yields Support Net Interest Income
Breaking down the Zenith Bank results, analysts at WSTC Financial Services Limited said interest income rose by 23 per cent to N474.6 billion in 2017 from N384.6 billion in 2016, largely driven by elevated yields on treasury bill instruments.
â€œIncome from treasury bills increased significantly by 82.3 per cent to N109.7 billion in 2017 from N60.2 billion in 2016 while interest on loans and advances recorded a modest growth of 15 per cent from N273.3 billion in 2016 to N314.6 billion in 2017. In line with industry trend, the bank reduced its risk asset exposure in favour of risk free instruments due to high credit risk and compelling yields on risk free instruments,â€ they said.
While the bankâ€™s loans and advances decreased by eight from N2.3 trillion in 2016 to N2.1 trillion in 2017, while investment in treasury bills increased by 66 per cent from N557.3 billion in 2016 to N936.8 billion in 2017.
In line with the high interest rate environment, interest expense also increased markedly by 50 per cent to N216.6 billion in 2017 (from N144.3 billion in 2016).
â€œThe spike in interest expense was also largely as a result of the bankâ€™s deposit structure which is highly tilted towards expensive deposits such as corporate and SME deposits relative to cheap retail deposits that contribute barely 18 per cent to total deposits. Expectedly, the major drivers of interest expense were interest expense on time deposits which grew by 50 per cent to N216.6 billion from N144.3 billion in 2016 and interest expense on borrowed funds which increased by 142 per cent to N80 billion from N33 billion in 2016,â€ they said.
Trading Gains Eclipse Huge Impairment Charge
The significant impairment charge was eclipsed by a marked increase of 456 per cent in trading gains to N157.9 billion in 2017 from N28.4 billion in 2016. Notably, trading income on derivatives and treasury bills spiked by 242 per cent to N68.7 billion and by 928 per cent to N88.8 billion respectively in 2017. Zenith Bank was able to maintain its operating efficiency as cost to income ratio remained flat at 52.7 per cent,â€ they said.
In their recommendation, WSTC said they expect growth in net interest income in 2018 to be driven by loan book growth and lower cost of funds in light of the moderation in yields on government securities.
â€œHowever, we believe the lower yields on government securities and the stability in the FX market will significantly dampen trading income and weigh negatively on earnings in 2018. Thus, we have a forecast earnings per share (EPS) of N5.06 in 2018.We have a fair value estimate of N32.83per share for the stock and we retain our HOLD recommendation,â€ they said.