Zenith Bank’s loan loss strategy is in its best interest

In its 9-month financial results for 2023, Zenith Bank recorded a remarkable pre-tax profit growth of 149.05% year-over-year, totalling N505.036 billion, the highest in Nigeria for this period. 

A significant factor in this performance was the substantial foreign exchange gains due to the Naira’s devaluation from ₦461.1/$ at the end of 2022 to ₦776.8/$ by September 2023.

Zenith Bank’s foreign exchange gains reached N378.122 billion in the nine months, with N354.376 billion in Q2 alone.

However, a decrease to N22.534 billion in Q3 moderated these gains. 

While Q2 saw peak quarterly gross earnings and post-tax profit, contributing to the nine-month performance, there’s more to consider.

Interest income increased by 72% to N670.932 billion, but interest expenses grew more sharply by 137% 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% to N415.228 billion. However, a 16.51% decline in net interest income after impairment charges and a 10% drop in net interest margin to 5.6% were noted. 

A spike in loan impairment charges to N209.999 billion, a 466% year-on-year increase, significantly affected the cost of risk, which jumped by 323% to 5.5%, 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% 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% 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% and a substantial decline in loan impairment charges in Q3 to N2 million. 

Additionally, the bank demonstrated strong shareholder returns, with a 95% growth in return on average equity to 35.1% and a return on average assets of 3.5%.

These figures highlight the bank’s efficiency in profit generation from shareholders’ funds and assets. 

Operational expenses were well-managed, evidenced by a 32% year-on-year decrease in the cost-to-income ratio to 37.8%. 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% increase year-on-year, and a trailing twelve-month EPS of N14.17.

Q3 alone registered an EPS of N3.29, marking a 107% growth over the period. With a year-to-date share price gain of 38.73%, 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.

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