GTB, Zenith Plc: Two banking sector giants go head to head
For Zenith and GTB Plc, making profit has become a culture, there is no bank that is as profitable as the two. Zenith Plc always earns far more than GTB but hardly converts a significant part of its earnings to profit the way GTB does.
In other words, Zenith Bank is not as cost-efficient as GTB, as their history of profitability performances has shown. Investors that are looking at investing in banks that are profitable, would probably consider the track records of Zenith and GTB Plc.
Peter Amangbo, Zenith Bank Chief Executive Officer and his counterpart at GTB, Segun Agbaje seem to understand the structure of Nigeria’s economy in relation to the banking sector. It has been different strategies for a different situation; and the results have been so wonderful – their numbers look good.
Both banks have very similar fundamentals, analysts’ notes have revealed. These two banks do not only have similar fundamentals, the performance of one can actually be used to predict the performance of another.
Their numbers are not distant from each other; except that their stock market price is a miles away on the bourse. Curious, right?
Two companies, in the same sector with similar fundamentals but a wide gap in quoted prices! Why GTB share is quoted at N38 and Zenith Bank is open at N25? Why are these two banks’ shares trading at different prices?
When Sam Chidoka, the Chief Executive Officer, Kairos Capital Limited said; “Perception is reality”. He meant it, really. Many other market experts also feel that the difference between the market prices of GTB & Zenith could only be explained by sentiments, call it market or investors’ sentiments, you are right.
Ayodeji Ebo, Managing Director, Afrinvest Securities Limited however said that the major reason is the higher return on equity (ROE) and assets (ROA) of GTB relative to Zenith bank Plc. In addition, efficiency in terms of cost-to-income ratio which is far better than Zenith also accounts for the difference.
In 2018 audited result, GTB Plc achieved a 30.90% return on equity and 5.56% return on assets. The bank excites shareholders with N2.50 dividend. However, Zenith did 23.8% and 3.3% respectively but paid N2.70 as dividends.
Perhaps, you think dividend payments as the reason for the disparity in the stock market price between GTB and Zenith.
You are neither wrong nor right but experts are not downplaying perception and leadership. Both are dividend-paying entities, a move that has become some sort of competition.
Of Zenith bank’s 31.5 billion total outstanding shares, foreign investors hold some 18% interest in Zenith bank, just as the Chairman who happened to be the founder has some 11% interest in the bank he founded.
Compare with GTB, the founding members seem to have distanced themselves from the operation of the bank, according to Broadstreet analysts. Institutional investors hold as much as 34% interest in GTB while other shares are widely spread.
For these banks, it is a battle for investors’ pockets and customers’ loyalties. These banks’ business focus seems to be parallel except for the fact that Zenith has started eyeing the retail end, their ambitions are very much alike.
Zenith and GTB Plc are the key contenders in the banking sector when it comes to profitability. They have never missed it. Not in the last 5-10 years.
Profitability Track
There is no bank in Nigeria that is as profitable as either of the two banks. Yet, market sentiments about how much an investor is willing to pay to obtain a share from either of the two are also different.
Perception, just as Sam said, is a key driver of share price in the stock market, some analysts also posited. Sentiments don’t go away easily, just as investors see key-man risk as factors that influence their decisions.
While investors like Chidiebere Onwuka seek to know what accounts for stock market price differential between GTB and Zenith. Chidiebere, a banker and financial expert thought more than a N13.00 difference in price could be absurd, his reason is that Zenith is as well governed as GTB.
Stockbrokers, analysts say
“Perception is reality”, Sam Chidoka said. To the Chief Executive Officer Kairos Capital; one of the banks is seen as owners managed and prone to onemanism and the other is seen as better in terms of risk management and corporate governance.
Sam’s opinion was supported by Ibrahim Dan Makoyo, another financial expert. He said it is the investing public perception and key-man factors that cause the price differential. Adesiyan Oluwafemi said sentiments prevail above analysis.
“Perception, nothing more. Zenith fundamental is as good as GTB, if not better but the market is yet to see it as such. Hence the gap”, Bode Adesegba said.
Omoamilor Vincent said An Investor who bought Zenith 5 years ago and still holding it would have collected more than half the price from the nice dividend they have been paying. Plus capital appreciation. I have always chosen Zenith ahead of GTB whenever I recommend it to investors.
While Chidiebere thinks more than a 50% difference in quoted price could be overkill, Sam is of the opinion that sentiments cannot be measured quantitatively. Meanwhile, Ikedichi Nwoke came to the rescue as the discussion was going on.
“The market ultimately determines value. If you think the market is wrong, take a punt and load up on Zenith shares. One of the two things will happen, the market will converge to your position and you will make a lot of money, or the market will once again be proven right and you will lose your shirt”t.
Atanda Isiaka, a stock market analyst said, “I remember sometime in the past when Zenith’s share price was above GTB. GTB was 8+ and Zenith was 15+.
“This difference stayed for almost two to three years what was the cause then? Pretty well, no obvious answer. They both have the same fundamental, but I guessed sentiments.
Now, GTB trades far above Zenith with both having the same fundamentals, what is the cause? Guessed, sentiment too. Now let us look at that sentiment….sentiment has changed to make GTB overtake Zenith in terms of their share price for over 6 years and still remain the same.
To Atanda, behavioural biases favour GTB more than Zenith Bank. If two companies have equal fundamentals but trade far apart, it portends that something is wrong.
The sentiment is not easy to erase from investor memory. The founding MD of GTB, Mr. Fola Adeola must be given the kudos for this share price variance. He bowed out of the bank voluntarily.
He established that the bank was not subjected to keyman risk. Unlike Zenith Bank, the founding MD, Mr, Jim Ovia was like forced out of the system by banking rules on the “MDship” tenure. If you research well, that was the beginning of GTB’s overtaking Zenith Bank.
This singular behaviour by both MDs was the cause of the share price difference. If u look at it very well, GTB overtook Zenith when the founding MD successfully transferred authority to his deputy.
Investors view this as a good succession signal, unlike Zenith Bank MD who hold the position till he was forced out. This would continue to remain in the investor’s memory and hence, that disparity in their share price would remain.
Like many investors looking at the bourse for profit taking where long or short-term position is either matter or irrelevant, both capital appreciation plus dividend excite investors all the time. But there is a Pharaoh’s dream standing tall as numbers ticker.
Ogochukwu Ndubuisi, an early investor who has eyes on the bourse asked; “how do you choose between two banks with some sort of similar fundamentals but quoted at different price.
Experts say there is no easy way but to keep your eyes on the ground and be hawkish in your stance.
Let’s review the fundamentals
Zenith still has highest market share in the banking sector. This is revealed by the amount the bank earned from its portfolio of interest earnings assets and non-interest earnings. In 2018, Zenith made N630 billion.
Of which this was the highest earnings in the sector. GTB earned N434.7 billion which means customers patronise Zenith more.
But the two banks have different areas of the market where they focused. Corporate banking, often deals with large ticket deals and Zenith is playing stronger here compared with GTB will retail market segment orientation.
How were the banks funded?
Zenith bank’s cost of funds as at the end of the financial year 2018 rested at 3.6%, and GTB did 3.4% as a retailer of money. It means, in terms of accessing the lowest possible funding cost, GTB is much better. Looking at the amount the two banks spent to fund interest earnings assets, it is more of the same pattern.
On every N100 generated from interest earnings assets in 2018, it cost GTB N27.52, which was against N24.66 the bank expended on providers of funds in 2017. However, Zenith Bank expended N32.83 on every N100 income generated from its portfolio of interest earnings assets in 2018.
This means that GTB was better at managing costs of obtaining funds than Zenith Bank Plc. So, somehow, investors tend to benefit from cost efficiency as it tends to impact the net margin and earnings per share.
Overall, it cost GTB N36.3 on every N100 it generated from its banking operations in 2018, as against N37.2 it incurred per N100 income in 2017. Zenith bank Plc on the other hand expended N46.4, as against N42.3 on each N100 income in 2017. What that means is that Zenith Plc was unable to control cost.
Where these banks did make money?
As of the beginning of 2018, GTB’s valued its loan assets at N1.449 trillion but closed the year at N1.262 trillion. GTB’s investment in securities was N672.973 billion at the beginning of the year, but the bank closed the year at N694.101 billion, representing a 3% uptick year on year.
From the portfolio of its interest earnings assets, GTB received interest income that amounted to N307 billion in 2018. Analysis of the numbers shows that GTB made about N14.47 on every N100 invested in interest-earning assets.
Meanwhile, Zenith Bank opens the financial year of 2018 with N2.596 trillion as loans to customers. Then, the bank closed the year at N2.497 trillion.
Investment in securities was used to close the gap in earnings loss as a result of its conservative stance on loan booking. Zenith bank Plc closed the financial year 2018 with N1 trillion invested in Treasury Bills, N565.312 billion in investment in securities. Putting so much in Treasury has been the pattern over time – Zenith loves Treasury Bills.
Loans and advances to customers were valued at N1.823 trillion at the end of 2018, compared with an opening balance of N2.1 trillion at the end of 2017. Though total loans including dues from banks pushed the book up to N2.497 trillion.
On average, Zenith earned at least N13 on every N100 invested in interest earnings assets. Then, by comparison, it would be observed that GTB was very efficient at generating earnings from its assets compared to Zenith.
Meanwhile, looking at the top line and bottom line performance, it would also be observed that Zenith could not be sustained as much profit from its gross earnings.
Though it generated more, N630.31 billion, it pretax profit was just around 36.75% of the total amount earned. GTB on the other hand converted 49.59% of the gross earnings into profit.
GTB non-performing loans has crossed regulatory benchmark, the bank closed the year at 7.3% against the 5% benchmark. In terms of assets quality, however, Zenith stands better as its non-performing loans was 4.9%, 100 basis points away from the regulatory red line.
What this means for GTB Plc is that; for every N100 credits assets, N7.30 faces default risk. But then when you look at the bank operating expenses, you would observe that Zenith’s overhead loads is about twice GTB’s.
And Zenith leveraged heavily in 2018 loaded with about N1.2 trillion debt finance, at the same time when GTB de-risk its books. At the close of the financial year 2017, GTB had about N313 billion borrowed funds in its accounts but paid a significant chunk as it closed the year with N178.6 billion obligated funds.
Unlike GTB, Zenith is well funded by its shareholders with N815 billion equity capital standing to its credit compared with N575 billion in GTB. Zenith bank booked credit impairment charges that was more than 4 times what the GTB take through its income statement in the 2018 results.
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Zenith offset N18.4 billion against operating income when GTB booked N4.9 billion. Though, GTB bank has NPL ratio that crossed the regulatory benchmark of 5%, the point where Zenith has been all-time cautious to reach.
