Zenith, GTBank Snapping at Each Other's Heels

Obinna Chima in this report, assesses the performances of Guaranty Trust Bank Plc and Zenith Bank Plc based on their half-year results

With the financial results of all the banks listed on the Nigerian Stock Exchange (NSE) for the period ended June 30, 2014 made public, a clear picture of the banking industry leaders has emerged.
Although the results reflected the effects of a prolonged tight monetary policy regime as well as other regulatory measures on the industry, the competition in the industry has heightened.

Clearly, the half year 2014 results churned out by Nigerian banks showed that earnings were mostly restrained as a result of the significant increase in the cash reserve requirement (CRR) by the Central Bank of Nigeria (CBN).
The central bank had further raised the CRR on public sector funds to 75 per cent in the first quarter of the year, from 50 per cent last year. Also, private sector CRR was increased to 15 per cent in the first quarter of 2014, from 12 per cent last year.

The banks were mostly hit by the hike in public sector funds which comprises deposits of all tiers of government as well as ministries, departments and agencies (MDAs) with the central bank. The monetary policy targets high-powered money (bank reserves plus vault cash) as a policy tool to address the depletion of fiscal buffers as well as decline in foreign portfolio inflows.

But in spite of the tough banking environment, Guaranty Trust Bank Plc (GTBank) and Zenith Bank Plc continued to strive to deliver values to their shareholders. A comparison of the total assets, profit, gross earnings, customer deposits, among others indices reported by both banks, showed that overall, both institutions drove towards achieving cost efficiency, increasing market share and driving revenue growth in the first half of the year.

Nonetheless, the headwinds to profitability included unavoidably high costs (electricity, rising staff costs, transportation).

Balance Sheets Analysis
As at June 30 2014, the combined total assets of GTBank and Zenith Bank stood at N5.437 trillion, higher than the N5.245 trillion it was as at June 2013. However, Zenith Bank recorded larger assets with total assets of N3.204 trillion, up from the N3.143 trillion it was as at the comparable period of 2013. On the other hand, GTBank’s total asset which stood at N2.234 trillion reflected an increase over the N2.103 trillion last year.

The largest contributor to both banks’ total assets was their loans and advances. Zenith Bank with total loans and advances at N1.413 trillion as at the period under review, as against the N1.276 trillion last year, gave out more loans compared to GTBank which loans and advances stood at N1.038 trillion as at June 2014, from N1.008 trillion last year.

In terms of total customer deposits liabilities, which represents depositors’ confidence in a bank, Zenith Bank also recorded a higher customer deposit with a total of N2.305 trillion, from N2.277 trillion in the comparable period of 2013. But GTBank’s customer deposits stood at N1.544 trillion, up from the N1.427 trillion recorded last year.

Profitability
The half year results also showed that both banks recorded an increase in their respective gross earnings. While Zenith Bank recorded gross earnings of N184.434 billion as at June this year, compared with  the N171.024 billion it was last year, GTBank’s gross earnings also climbed by 7.1 per cent to N133 billion from N124.2 billion in 2013.

Also, Zenith Bank’s net interest income dropped marginally to N90.744 billion in the period under review, compared to N91.357 billion as at June last year. This represented a decline by 0.7 per cent. But its non-interest income climbed by 30 per cent to N45.234 billion, from N34.771 billion last year. Also, its operating expenses advanced to N75.171 billion as at June this year, from N70.429 billion, just as it recorded profit before tax of  N57.859  billion, up from N54.083 billion as at June last year. In addition, profit after tax stood at N47.445 billion.

On the other hand, GTBank’s profit before tax slipped by seven per cent to N53.4 billion, as against the N57.4 billion recorded in the corresponding year. This, the bank attributed to loan impairment charged to its profit and loss account during the period. The impairment charge was as a result of a significant loan it said it made provision for, following the demise of the obligor in line with corporate governance practice.

But GTBank’s net interest income advanced by 4.4 per cent to N71.6 billion as at June this year, up from N68.5 billion it was last year. It operating expenses also went up by 9.1 per cent to N45.4 billion, from N41.6 billion, while profit after tax stood at N44 billion, from N49 billion.

Share Price Performance
GTBank’s share price performance on the NSE monitored showed that it has recorded a year-to-date growth of 7.63 per cent from the N27.75 per share it was as at January 2, 2014, to N29.87 per share last Friday. It also stood at N25.50 per share on the last trading session of the first quarter and N28.95 per share when the closing bell was rang on the last trading session of the second quarter.

On the other hand, Zenith Bank share price recorded a year-to-date decline of one per cent, from N25 per share as at January 2, 2014, to N24.75 per share last Friday. It had dropped to N20 per share as at March 31, before it climbed higher to N25.05 per share as at the end of the second quarter.

Analysts’ Verdicts
According to a banking analyst at Renaissance Capital, Mr. Adesoji Solanke, 2013 was the year for Nigerian banks to take the pain, while 2014 is a year for the banks to stabilise and 2015 “is when we expect to start seeing green shoots of recovery.”

Commenting on Zenith Bank’s performance, Solanke noted that the resilient non-interest revenue (NIR), which moved up 29 per cent year-on-year, was supported by strong forex trading income.

Solanke added: “Clearly this was another challenging quarter to deliver earnings growth but in the context of the tougher banking environment, we think Zenith’s performance was decent.

“Key positive for us is how the bank has managed to offset the impact of the regulations by growing forex trading revenues,” Solanke said.
But he noted the drop in the bank’s net interest margin to 7.4 per cent, and attributed it to the lower yield environment for liquid assets and the impact of the increase in public and private sector CRR.

“We think management continued to work on re-pricing its deposit book, which translated to improved funding costs during the quarter, though not sufficient enough to offset the year-to-date impact of its lower asset yield on margins,” he added.
Also commenting on GTBank’s performance, Solanke said one of the key drags on the bank’s results was the higher-than-expected
impairment charge for the quarter.

In an environment where delivering revenue growth was already operationally constrained, he pointed out that the shock to the impairments line was the last thing investors would have wanted to see.

The impairment charge was largely driven by one asset – Lister Flour Mills where management of GTBank had observed signs of stress in the repayments and was contemplating classifying the loan as sub-standard.  The loan was thereafter classified as doubtful and a 50 per cent provision was taken, following the death of the promoter.

An interim audit also triggered the frontloading.
“We conservatively forecast a flat impairment charge by full year 2014, implying a N5.5 billion in full year 2014 provisions and a 0.5 per cent cost of risk. Loan growth of three per cent year-to-date was poor versus 11 per cent for Zenith Bank. Management attributes this to its decision to liquidate some exposures in the commercial space, where it feels assets are not being justifiably priced for their inherent risk. Credit drivers will be foreign-currency-related, as this is where management continues to see credit demand from its acceptable obligors in sectors such as upstream oil and gas, maritime (vessel finance) and manufacturing,” he explained.

However, the Chairman, Association of Issuing Houses of Nigeria, Mr. Victor Ogiemwonyi pointed out that banking has gotten to a new level in the country.

He noted that most banks have recorded strong growth in their balance sheets over the years, which according to him, comes with its own challenges.

“The banks have stabilised now, so you don’t expect them to be growing at double-digits every year. So, we should expect gradual growth from banks as the economy grows. There are so many other issues such as the Boko Haram, elections and these are things also impacting on businesses. Don’t forget that the banks have also been conservative. They have all cleaned their balance of bad debts and are now cautious,” Ogiemwonyi explained.

Furthermore, analysts argued that the announcement of the inclusion of another FGN Bonds in the JP Morgan Bond Index and the favourable sovereign credit rating on Nigeria have generated a lot of interests in government securities, predicting that it would cause prices to rise and yields to drop.

To this end, they anticipated that yields on fixed income securities to drop further because of the improvements in the macroeconomic environment in Nigeria.

“This will mean that a huge proportion of the interest income of banks will drop going forward if they are to maintain the current position. In order to mitigate this, we expect that banks will increase their risk assets to generate interest income that will make up for the drop in the yields on risk free assets,” analysts at FSDH Merchant Bank Limited stated.

Banks’ CEOs Explanations
Commenting on   the performance of GTBank, its managing director/chief executive officer, GTBank, Mr. Segun Agbaje attributed the performance to the hard work of staff members, commitment of management team and continued support from its customers.
He further stated that the second half of the 2014 financial year would be a stronger period during which the bank would make positive improvements in its market positions across its key products and business segments.

A major objective for the bank this year, according to Agbaje is to offer customers greater convenience and accessibility to services using internet and mobile solutions.

“We have to date achieved over a million downloads of our mobile banking app and experienced a 25 per cent increase in active internet banking users,” he said.

On his part, the Group Managing Director/Chief Executive Officer, Zenith Bank, Mr. Peter Amangbo noted that the results further confirmed the bank’s continued leadership in consistently delivering superior performance and returns.
According to the Zenith Bank boss, the performance was driven by the bank’s innovative processes, cutting edge technology and committed staff members.

“The growth in risk assets (priced to maximise returns) was effectively matched by a corresponding increase in competitively priced deposits with a view to maximising net interest margin.

“Zenith Bank Plc remains stable and adequately capitalised, which positions it strategically to take advantage of emerging business opportunities. The Group’s liquidity ratio of 61 per cent and capital adequacy ratio of 23 per cent, which are above the regulatory limits of 35 per cent and 16 per cent respectively, further confirm the group’s capacity to expand,” he added.

Source: ThisDayLive