The Nigerian banking sector has demonstrated a notable degree of resilience in the face of significant domestic macroeconomic challenges and global economic pressures that have impacted performance over the past five years.

Nonetheless, this resilience has occurred amid a backdrop of sluggish economic growth, with GDP growth gradually declining from a rebound of 3.4% in 2021, following the COVID-19 pandemic, to 2.74% in 2023.

The industry's adaptability and innovation, exemplified by the shift to a financial holding company structure and the enhancement of banking licenses by certain institutions, have been crucial in sustaining the sector.

Partnerships with financial technology firms (FinTechs) and collaborations with both domestic and international development finance institutions (DFIs) have further bolstered the Nigerian banking landscape.

Given the essential function of the banking sector in facilitating economic activity and growth through financial intermediation, it is anticipated that this sector will play a vital role in driving Nigeria's economic development in the coming decades.

In the wake of President Tinubu's inauguration, the new administration has introduced various reforms aimed at addressing existing macroeconomic imbalances.

"We are optimistic that these reforms, which include the elimination of the petrol subsidy, harmonization of exchange rates, tax reforms, and the reestablishment of a systematic approach to calculating cash reserve requirements (CRR), will create growth opportunities for the banking industry."

In alignment with the Tinubu administration's goal of establishing a 1.0 trillion-dollar economy by 2030, the Central Bank of Nigeria (CBN) has emphasized the necessity for banks that are not only stronger but also better capitalized to meet the demands of a rapidly expanding economy. This has led to a call for recapitalization.

Historically, the Nigerian banking sector has undergone multiple recapitalization initiatives aimed at enhancing the minimum capital required for both local and global competitiveness. A notable example is the 2004-2005 banking recapitalization, which significantly strengthened the sector and reduced the number of operational banks from 89 to 25.

While this initiative addressed issues related to corporate governance and provided essential financial stability, technological advancements, and improved international standing, it was not without its shortcomings.

The influx of capital during this period resulted in the creation of unhealthy loans and a persistent rise in non-performing loans, leading to increased risk management challenges.

These setbacks prompted the discontinuation of the universal banking model, the establishment of the Asset Management Corporation of Nigeria (AMCON), and a revision of capital requirements in 2010.

In response to these developments, the CBN introduced a new capital structure for banks in its March 2024 capital requirement guidelines, aimed at further strengthening the financial system and supporting the government's ambition of achieving a 1.0 trillion-dollar economy by 2030.

The necessity for a revised capital base has become evident due to the significant erosion of banks' capital buffers since 2010, both in real and foreign exchange terms.

As of 2023, the existing minimum capital levels have diminished by 77.1% in foreign exchange terms and 76.5% in real terms compared to 2010.

To address this capital shortfall, the CBN took into account the effects of macroeconomic challenges on banks' risk profiles and financial standings when establishing the new capital thresholds.

Although these criteria seem comprehensive, the sustainability of the new capital requirements may be challenged by unforeseen macroeconomic conditions.

Overview of Zenith Bank Plc

Zenith Bank Plc was founded in May 1990 and began its operations in July of the same year as a commercial banking institution.

On June 17, 2004, the Bank transitioned into a public limited company and subsequently listed its shares on the Nigerian Exchange Group (NEG) on October 21, 2004, following a successful Initial Public Offering (IPO).

Currently, Zenith Bank boasts a shareholder base exceeding 500,000, making it the largest bank in Nigeria by tier-1 capital. In 2013, the Bank raised $850 million by listing its shares at $6.80 each on the London Stock Exchange (LSE).

With its headquarters located in Lagos, Nigeria, Zenith operates 393 branches and business offices strategically positioned in key commercial areas across all states and the Federal Capital Territory (FCT).

In March 2007, Zenith Bank received authorization from the Financial Services Authority (FSA) of the United Kingdom to establish Zenith Bank (UK) Limited, serving as its UK subsidiary.

The Bank also has subsidiaries in Ghana (Zenith Bank (Ghana) Limited), Sierra Leone (Zenith Bank (Sierra Leone) Limited), and Gambia (Zenith Bank (Gambia) Limited), along with a representative office in the People's Republic of China.

Zenith Bank aims to expand its brand presence into other African nations as well as European and Asian markets.

Pioneering digital banking in Nigeria, Zenith Bank has achieved numerous milestones in the implementation of Information and Communication Technology (ICT) to develop innovative products tailored to the needs of its extensive customer base.

The Bank is recognized as a leader in the adoption of various banking technologies, with the Zenith brand becoming synonymous with cutting-edge advancements in the banking sector.

The Bank is committed to a culture of excellence and a rigorous adherence to global best practices. By integrating visionary leadership, expert banking skills, and advanced technology, it has developed products and services that not only meet but also anticipate customer needs, fostering business growth and wealth creation for its clients.

Over the years, the Bank has experienced remarkable growth, establishing itself as one of Africa's premier financial institutions, currently holding the position of the 10th largest bank on the continent.

Since its inception, the Bank has expanded its shareholders' equity from N20 million in 1990 to an impressive N1.38 trillion by the end of 2022.

Today, the Bank thrives on its core values, strong brand reputation, and a corporate culture centered on professionalism and service excellence, which serve as the foundation of its operations.

In alignment with its decision to pursue a commercial banking license with international recognition, the Bank will continue to provide specialized financial services, including Corporate, Investment, and Retail Banking, as well as Commercial and Consumer Banking, Personal and Private Banking, Trade Services, Foreign Exchange, Treasury and Cash Management Services, and Pension Management.

Additionally, various Non-Bank Financial Services such as Insurance, Capital Market activities, Trusteeship, Registrar, Mortgage, and financial advisory services will be managed through its subsidiaries, in accordance with its HoldCo Scheme of Arrangement.

Recent Full-Year Financial Performance:

Zenith Bank Plc's recently audited financial statements for the fiscal year ending December 2023 (FY-2023) indicate significant growth, with Gross Earnings (GE) and Net Income (PAT) increasing by 127.6% and 202.3%, reaching N2.15 trillion and N676.91 billion, respectively, in comparison to FY-2022.

The surge in GE was primarily fueled by Interest Income (INC), which saw a year-on-year increase of 111.9%, amounting to N1.14 trillion. Additional contributors to GE included Fees and Commission Income, accounting for 16.1% of GE, and Trading Income, which represented 14.7% of GE.

Source: ZENITH Plc FY-2023 AFS Data, Investdata Research

Remarkably, the tier-1 bank demonstrated improved performance despite facing macroeconomic challenges, including rising interest and inflation rates throughout 2023.

Similar to its competitors, Zenith Bank capitalized on foreign exchange (FX) gains from its open FX positions. However, this advantage is unlikely to continue into 2024, as the Central Bank of Nigeria (CBN) has mandated that local banks maintain a zero-forward position, restricting their ability to leverage unused FX balances for trading profits.

Nonetheless, the bank's operational performance remained robust. The net interest income experienced a remarkable increase of 100.80% from FY 2022 to FY 2023, indicating the bank's ability to maintain a healthy spread in its core lending and deposit activities.

In light of the positive income trends, the earnings per share (EPS) for FY 2023 rose to N21.56 kobo, an increase of N14.43 kobo from the N7.13 kobo recorded in FY 2022, resulting in a Price/Earnings Ratio (PE) of 1.66x based on a closing market price of N35.70 as of August 5, 2024.

Recent 6M-June-2024 Financial Performance:

Zenith Bank Plc's unaudited financial statements for the half-year ending June 2024 (6M-2024) highlight a significant development for the tier-1 bank as it approaches its full-year results for 2024. The bank achieved notable growth in both Gross Earnings (GE) and Net Earnings (PAT), increasing by 117.3% and 98.1%, respectively, compared to the figures from 6M-2023.

Source: Zenith Bank Plc 6M-24 UFS, Investdata Research

INC bolsters by loan growth accretion

The General Earnings (GE) reached N2.10 trillion, falling just 2.34% short of the total for FY-2023. The significant growth in GE during the first half of 2024 was largely attributed to Interest Income (INC), which surged by 176.7% year-on-year to N1.15 trillion, accounting for 54.7% of the overall GE.

Other key components of the GE included Trading Income, which made up 37.9%, and net Fees and Commission Income, contributing 5.2%.

The increase in INC was primarily fueled by the growth in loans extended to customers, which rose by 140.3% year-on-year to N610.36 billion.

Additionally, investments in government financial instruments, such as treasury bills and bonds, yielded higher returns during this period compared to the same timeframe in 2023, benefiting from a favorable yield environment. Specifically, returns from treasury bills (NTBs) increased by 269.2% year-on-year to N261.31 billion, representing 22.7% of the INC, up from 17.0% in the first half of 2023.

Higher business activities drove cost heads

Investments in government and other bonds also saw substantial growth, rising by 220.7% year-on-year to N193.77 billion, which constituted 16.9% of the INC, compared to 14.0% in the previous year. It is important to note that during this period, the Central Bank of Nigeria's Monetary Policy Committee (MPC) raised the benchmark interest rate (Monetary Policy Rate, MPR) by 750 basis points.

The increase in business activities contributed to a rise in costs. Interest expenses escalated by 182.9% year-on-year to N434.36 billion, driven by a 429.0% increase in interest paid on borrowed funds, a 75.8% rise in interest on time deposits, and a 162.0% increase in interest on current and savings accounts (CASA) deposits.

Despite the rising costs, Net Interest Income (NIC) grew by 173.1%, resulting in a 696 basis points increase in Net Interest Margin, which reached 34.03%.

Moreover, Operating Expenses (OPEX) increased by 15.9%, primarily due to the AMCON levy (257.7% of OPEX), fuel and maintenance costs (15.2% of OPEX), and Information Technology expenses (6.9% of OPEX).

Impairment charges experienced a significant increase of 99.7%, reaching N434.36 billion, primarily due to a 71.9% rise in the Bank’s gross loans and advances to customers amid challenging economic conditions. Consequently, the non-performing loan (NPL) ratio increased to 4.9%, compared to 3.9% in the first half of 2023.

Net Income Reflects Increased Business Activity

With a positive trend in income sources, pre-tax profit surged by 107.5%, amounting to N727.03 billion. Total tax expenses rose to N149.03 billion, influenced by heightened income, education, and information technology taxes, marking a 154.2% increase from the first half of 2023.

Despite the rising tax burden, net income (PAT) grew by 98.1%, reaching N578 billion compared to the first half of 2024. This improvement in PAT resulted in earnings per share (EPS) of N18.41 kobo for the first half of 2024, an increase of N9.12 kobo from the N9.29 kobo recorded in the first half of 2023, leading to a Price/Earnings Ratio (PE) of 2.08x based on the closing market price of N38.25 on Friday, September 30, 2024.

Total Assets Continue to Rise

The Group’s total assets increased by 35.4%, reaching N27.58 trillion compared to the figures reported for the fiscal year 2023. This growth was partially driven by a 4.9% rise in cash and cash equivalents, indicating a strong liquidity position.

Total liabilities also grew by 35.1%, amounting to N24.38 trillion, significantly supported by a 29.4% increase in deposits. The faster growth of total assets relative to total liabilities resulted in a substantial increase in shareholders’ funds, which rose by 37.5% to N3.19 trillion compared to the N20.37 trillion reported for the fiscal year 2023.

Interim Dividend and Bonus Issue for Shareholder Advantage

The Board of Directors has proposed an Interim Dividend of N1.00 per share of 50 kobo each, which will be subject to the appropriate withholding tax deductions. This dividend will be distributed to shareholders listed in the Company’s Register of Members as of Monday, 16 September 2024.

We maintain a BUY recommendation for ZENITH

Our target price for ZENITH has been revised to N50.00, up from the previous target of N45.00, with a 12-month outlook.

The new target price of N50.00 is now set for a 6-month period, extending to March/April 2025, coinciding with the release of FY-2024 financial results and dividend announcements.

This target price indicates a potential upside of 33.3% compared to the closing market price of N37.50 recorded on Friday, 06 September 2024, presenting an appealing investment opportunity.

Zenith's robust financial performance, favorable valuation, and promising growth prospects position it as a strong investment choice. This is particularly relevant given its Rights Issue price of N36.00 and a 52-week peak of N47.35.

Additionally, Zenith has attracted considerable interest from foreign portfolio investors, as demonstrated by significant inflows of FPI.

Key investment considerations for Zenith Bank include:

  • Capital Gains Potential: Zenith Bank is recognized for its ability to generate capital gains for investors through increased stock liquidity on the Exchange, thereby enhancing investor wealth.
  • Consistent Dividend Returns: With a solid financial foundation, Zenith Bank offers reliable dividend payouts, providing shareholders with a steady income stream.
  • Strong Corporate Governance: The Bank is managed by a seasoned and respected leadership team dedicated to maintaining high standards of corporate governance and effective enterprise-risk management.
  • Increased Shareholder Value: Zenith Bank is focused on expanding its reach beyond Nigeria, pursuing strategic international growth and investing in IT infrastructure, which contributes to a stronger financial position and improved net income.