Zenith Bank Plc: delivering on promises

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By Folakemi Emem-Akpan

Introduction
Zenith Bank had a relatively good outing in terms of profitability for its 2015 financial year. While profitability ratios were a little lower than those of 2014, they yet surpassed most banks’ corresponding ratios for 2015. The ratios are also still high enough for the bank to be considered effective.
Shareholders benefited from this profitability, drawing more dividend per share in 2015 than they did in 2014. Even then, the Zenith Bank stock is currently undervalued and is not selling at a price that reflects its potential. This is a good time for prospective investors who have the capital wherewithal to consider buying into the stock right now and holding it for a while for the purpose of capital gains.
Also for its investors and shareholders, the 2016 financial year seems to be shaping up to be a better one than 2015, if the third quarter results are anything to go by.

Core operations
As was the trend with many banks for the 2015 financial year, clients patronised Zenith Bank a little more in terms of procuring loans, overdrafts and advances, and the bank’s loan portfolio increased significantly to N1.99 billion. Despite this, average lending interest rate decreased over the preceding year’s, while average deposit interest rate increased. This means that the bank charged its lenders less, but paid its depositors a better interest.
This caused net interest margin, the true test of a bank’s effectiveness in its core banking operations of lending and borrowing, to moderate to 64.5 per cent in 2015 from 65.9 per cent in 2014.
The bank’s gross earnings (an addition of its interest income and other fees and commissions) increased to N432.5 billion during the course of the year, 7.2 per cent better than the prior year’s. Pre-tax profit was able to grow only by 4.8 per cent to N125.6 billion, and profit after tax grew by 6.2 per cent to N105.7 billion.
Earnings per share, was predictably higher than that of the prior year, closing at 336 kobo, as compared to 316 kobo before. Dividend per share also improved, but only slightly so to 180 kobo in 2015 from 175 kobo in 2014.

Profitability ratios
Despite a high turnover during the course of 2015, as well as better profits, the bank did not record an improvement in its profitability ratios. Profit margin for the year was 29 per cent, slightly lower than 29.7 per cent in 2014, meaning that for every N100 earned by the bank in the course of the year, N27.00 made it to the profit position, compared with N27.90 for the preceding year.
Returns on assets and equity also both declined slightly in 2015. Return on assets (ROA) to 3.1 per cent from 3.2 per cent, and return on equity to 17.8 per cent from 18.0 per cent. It is important to note that the declines in profitability ratios were very slight.
Zenith Bank was one of the few that did not downsize its work force in 2015. In fact, its employee number increased to 7,416 persons in 2015 from 7,278 persons in 2014. Earnings per employee improved to N58.3 million on the average, up from N55.4 million in 2014. Meanwhile, average employee cost during the course of 2015 was N9.1 million. This is an indication of employee productivity and company efficiency.
Other ratios
The proportion of the bank’s loans classified as non-performing assets during the year was 2.2 per cent, higher than 1.8 per cent in 2014, but still within acceptable levels. In fact, this 2.2 per cent result was one of the lowest and best in the banking industry for that period.
In terms of capital adequacy, Zenith Bank performed better, but only slightly so, in 2015 than it did in 2014, as its result for the year was higher than the preceding year’s. Its equity (a company’s primary and cheapest source of funding) could finance about 21 per cent of the loans and advances it gave out to borrowers, up from 20 per cent recorded in 2014.
Zenith Bank’s current ratio was 1.2 times and this matched its peers’ in the industry for 2015.
The bank had a debt to equity ratio of 5.7 times, meaning that it is using N5.70 of liabilities in addition to each N1.00 of shareholders’ equity. In other words, the bank is using N5.70 of total capital for every N1.00 of equity capital.
Sustainable growth
The bank gave a total dividend of N1.80 per share held for its 2015 financial year, and the proportion of dividend to profit was lower. Retention ratio in 2015 was therefore 0.47 times, higher than 0.45 times in the preceding year.
Asset turnover for the year was 0.11 times, same as the year before, while assets/equity was 6.7 times. Analysis shows that sustainable growth for 2015 was 10.1 per cent and recorded no significant change from the 10 per cent it was in 2014.
This means that using only the revenue it generates, this bank had the capacity to grow up to 10 per cent. It however grew at a slower 7.2 per cent (as determined by its actual growth, not reaching its growth ceiling. This is a different scenario to 2014 when sustainable growth was lower than actual growth (14.7 per cent).

Stock value
On December 9, 2016, the market price of Zenith Bank was N14.50, and this was the second highest in the financial services sub sector. Because EPS was N3.36, P/E ratio as at analysis date was 4.4 while earnings yield was 1.07. Both were high enough for the stock to be regarded as low-priced.
There is more good news for the investor. Net assets per share was N18.93, higher than the current market price of N14.80 and therefore quite attractive.
Price to sales ratio for the analysis date was 1.07 and is therefore favourable for the investor. This is because this ratio looks at the current stock price relative to the total sales per share, and reflects the value placed on sales by the market. The lower the P/S ratio, the better the value.
The company is also worth more on paper than it is on the floor of the Nigerian Stock Exchange, as shown by a lower market value as compared to its book value. This also, is good news for the investor. At the current market price of N14.50, we recommend a buy for investors who are willing to hold on to the stock for a while.

Unaudited results
The Zenith Group’s third quarter result for 2016 shows both top line and bottom line growth, with revenue growing by 12.9 per cent to N380.4 billion when compared with the same levels in the prior year. Bottom line growth was a little bit faster. After tax profit for the period was N100.1 billion, 20.5 per cent higher than the corresponding figure in 2015. Earnings per share, at 318 kobo was also higher than the 264 kobo achieved in the same period last year. The bank’s net interest margin for the period was 66.1 per cent, better than the 63.0 per cent recorded in the prior year. Proportion of non-performing loans was 2.2 per cent, higher than what was recorded for the same period last year, but same as the final result for its 2015 report.

Unique strategies

One unique thing about Zenith Bank is its commitment to promoting good corporate governance and best practices in the conduct of its business. It has been generally adjudged a corporate governance compliant bank by the Nigerian Stock Exchange (NSE), hence its recent listing on the Premium Board of the Exchange. Its management and directors always say that it is a Zenith Bank philosophy that good corporate governance engenders public trust and ultimately ensures that the company meets the expectation of all stakeholders.
The Bank has a diverse shareholding structure with no single ultimate individual beneficiary holding more than 10 per cent of the bank’s total shares. Hence, a board meeting is truly a meeting of minds to strategise on how to continuously move the bank forward.
This is evident in its operational successes. For example, it opened ten new branches in 2015 while some other banks shut down some of their own branches.

Conclusion
Despite the general unsteadiness in the banking industry, Zenith Bank seems to have weathered the storm very well, turning out a profit that is considered sizeable. Its current unaudited results suggests that it might end 2016 on a better note than it did in 2015.

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