Zenith Bank – High loan growth and solid profit margins for financial year 2023

Zenith Bank (Zenith) disclosed a remarkable increase in Pre-tax profits (179.6% y/y) and Net profits (202.0% y/y) in its FY23 audited financial report. The Q4 performance also showed a positive trend, with Pre-tax profits (254.4% y/y) and Net profits (387.0% y/y) experiencing significant growth. The board declared a final dividend of N3.50/s (total dividend: N4.00/s FY23) based on the FY 23 EPS of N21.55. This translates to a dividend yield of 11.0% as per Thursday’s (25th April) closing price. The strong performance was primarily fueled by Net-interest income and Non-interest income, especially trading revenues which saw a substantial increase in Q4 23, surpassing expectations. However, the market’s reaction to the results was subdued due to bearish sentiment following the CBN’s circular on bank recapitalization.

Financial Performance
The interest income experienced a significant growth of 111.9% year-on-year (y/y), primarily due to an 81.4% y/y increase in interest earned on customer loans. The loans and advances to customers also showed a strong growth of 63.4% y/y, surpassing the management’s guidance of 35% and marking the highest loan growth since 2019. On the other hand, the interest expense increased by 135.4% y/y, driven by the growth in interest paid on both customer deposits (150.0% y/y) and borrowed funds (103.4% y/y), as a result of rising funding costs. Consequently, the cost-of-funds rose by 107 basis points to 3.0%, while the Current Account Savings Account (CASA) mix decreased to 78.6% from 84.6% in FY 22. However, the net interest income grew by 100.8% y/y, leading to an increase in the Net Interest Margin to 6.2% (compared to 4.5% in FY 22) due to improvements in market yields.

Non-interest revenue also witnessed significant growth, with a 141.2% y/y increase, driven by a 166.6% y/y rise in trading revenues, supported by gains on trading derivatives and foreign currency revaluation gains (+808.6% y/y). However, the net fees and commission revenue declined by 17.7% y/y, mainly due to a substantial increase of 179.3% y/y in fees and commission expenses, while fees and commission income grew moderately by 12.9% y/y. Additionally, operating expenses grew by 32.3% y/y, primarily driven by the AMCON levy and information technology costs, resulting in the bank’s cost-to-income ratio settling at 27.2% (compared to 45.4% in FY 22). As a result, the pre-provision operating profit rose by 195.6% y/y. However, there was a significant increase of 232.3% in loan loss provisions due to poor macroeconomic conditions. The pre-tax profit showed a substantial growth of 179.6% y/y.

Asset quality

Asset quality remained robust, with the non-performing loans ratio standing at 4.4% (compared to 4.3% in FY22), which is below the regulatory limit. This is a commendable achievement considering the challenging macroeconomic conditions. Furthermore, the bank’s Capital Adequacy Ratio (CAR) closed at 21.7% (compared to 19.8% in FY22), surpassing the regulatory requirement of 15.0%.

Conclusion

In conclusion, the market is expected to experience a yield pick-up following the 600bps hike in the MPR rate, which will contribute to increased interest earnings, especially in Q1 24. The bank’s retail and digital strategy is anticipated to continue driving its success, positively impacting interest income as well as fees and commission income. Additionally, the bank has disclosed plans to seek authorization for additional capital raise at its annual general meeting (AGM) scheduled for today, demonstrating its commitment to recapitalization. SOURCE: Coronation Asset Management Limited