Zenith Bank spreads into retail lending, says won’t fly M&A for managerial hubris

Zenith Bank Plc. has said retail banking is now its major focus as lender pitched organic growth strategy against merger and acquisition.

The management restated lender’s position that seeks to build retail organisation.

However, this drive that has started in 2018 has started gaining momentum with increased activities in retail lending.

This was made known at earnings conference call with analysts. According to the lender, it said major focus is to build retail organisation.

For 2020, Zenith guided to grow loans, deposits by 2% it had stretched its loan book in 2019 by 22% at the time when its total deposit went up 15%.

This made analysts to have speculated, that perhaps Zenith would be looking for a potential acquisition to leverage in order to deepen footprints in the retail segment.

In 2019, lender added more than ₦400 billion to its loan book with support from retail.

Earnings call discussions

Speaking with analysts, the Group Managing Director/Chief Executive Officer, Ebenezer Onyeagwu said the performance was supported by remarkable growth in retail and digital business initiatives.

Zenith recorded an increase in fees and commission on retail and electronic products, from ₦20 billion to ₦42 billion in 2019, which translate to a 108% growth.

The result also shows that non-interest income came in strong with a 29% growth, as 2019 figures stood at ₦232 billion against ₦178.9 billion in 2018.

“We have remained very effective as we continue to rein in the key levers of cost. We have seen cost-to-income ratio dropped from 49.3% to 48.8%”, the GMD told analysts.

The bank cost of funds dropped from 3.1% to 3%, while cost of risk remains moderately stable at 1.1%.

Profit performance: Metrics

Speaking alongside with Onyeagwu, Mukhtar Adam the Chief Financial Officer (CFO) said: “In the year, pre-tax profit increased 5% from ₦231.7 billion to ₦243.3 billion.

PAT expanded from ₦193 billion in 2018 to ₦209 billion, representing 8% growth.

Mukhtar attributed growth in PBT to growth in top line and cost containment during the period as he explained that it was driven by the growth in fees and commission income.

The financials shows that fees on electronic products grew from ₦20.4 billion to ₦42.5 billion, representing 108% growth but interest income drop by 6%.

“As a bank, we responded to the drop by repositioning our funding sources, which resulted in 2.4% drop in our cost of funds that closed at 3% from 3.1%”, the CFO stated.

Its impairment charge however increased by ₦5.7 billion largely due to the growth in loan book.

Operating expenses drop by 7% due to continuous work on cost optimization and efficiency while cost-to-income ratio moderated down to 48.8% from 49.3%.

Lender’s return on equity (ROE) however remained flat. Its return on assets (ROA) increased to 3.4% from 3.35%.

The management explained that the growth in the loan book, however, did not lead in deterioration in its non-performing loan (NPL).

Lender’s NPL ratio declined by 16% from 4.98% in 2018 to 4.3% in 2019. The bank said it closed the year with a loan-to-deposit ratio of 68.7% and 57.7% for the group.

Eurobond market

On whether Zenith is planning to approach the Eurobond market for fund, the GMD/CEO said: “if you recall, at the end of April, 2019 we had a redemption of the bond that matured, that was $0.5 billion.

“In the course of the year, precisely in August, we did a tender offer and bought back about $400 million out of the $500 million we issued.

“So far, we don’t think it’s economical for us to launch another tender offer to buy back the balance. So we’ll see that balance up to maturity”, Onyeagwu held.

He said new issues will be determined by what opportunities we see in the market. If there is any opportunity, and we think the pricing is right, we approach the market.

Zenith guided to grow loans and deposits by 2% in 2020 to balance its LDR and credit creation target.

Onyeagwu said loan growth is a reflection of what we see in the macro space.

“You can’t grow beyond the economy in which you’re operating. The issue of the coronavirus is taking a major toll on business.

“China today remains the global hub for logistics and supply chain.

“If China is under attack, it’s going to have serious impact on, consequences on the global business. We have to be conservative and cautious as we begin to project this guidance”, he added.

CBN loans to deposit ratio

Mukhtar said if you look at the loan growth guide that we have given, 22% growth in our loan book within this year is significant.

He told analysts to note that some of the loans lender have been disbursed. A lot of them will be due for payback, pay down during 2020.

“There is a lot of repayments during this year and then you will recycle them. Look at our deposit growth, we have guided deposit growth of around 2%.

“The two of them have to go together. If we have big opportunities to disburse more loans, of course, we will fund it by also going out to grow our deposits”, Mukhtar explained.

We operated in such a manner that we will achieve the LDR of 65%, at least to avoid the obvious consequence of having the CRR debit being levied.

Retail performance

Reacting to the lender’s retail performance in 2019, GMD said: “retail is now a major focus for us. So we are keeping retail and SME on a different segment and buckets.

“Doing this will help us to have proper understanding and appreciation of impact on business in terms of contribution to top line, in terms of loan and impact in terms of NPL”.

The management held that Zenith set out in 2018 to build a retail organization.

“I can see the result of that from the growth even from the contribution of the retail segment to the gross revenue, which increased significantly from 6% to about 13%”, Mukhtar stated.

He said: “We set out to build the retail organization and came out with the products that can excite the market.

“We leveraged on our corporate relationships, came up with advanced analytics. Also started what we call digital customer onboarding”.

“All these strategies will continue.

“We’re going to build on them. So we don’t expect our income from electronic products to drop at all, rather we’re expecting to increase further, the management remarked.

Zenith achieved a ratio of 64.68% for loans to fund ratio of 31st of December. So we had a very small shortfall for which we paid very small amount of.

Probable acquisition

I think the first thing to note is that our growth aspiration hasn’t changed, the GMD stated.

He added that Zenith is desirous of growing, and have also maintained that its growth strategy still remains organic.

Onyeagwu said: “However, if we find anything interesting and disciplined in the market, we can consider some corporate action”.

He added that the trigger for acquisition is that it has to be disciplined, bring a lot of value and be consistent with our culture, style and values”.

“We will not do any M&A just because of the fun of it. It’s not for the managerial hubris. If we are going to do it, it’s going to be for strategic reasons”, the GMD said.

The CBN increasing the capital base.

The management believe that Zenith Bank has robust capital. Zenith assures that it doesn’t anticipate capital base increment to be a problem.

“What we’ll continue to do is to reinforce and strengthen our capital at all times”, Onyeagwu said.

Speaking on capital adequacy, the GMD said if you take a look at our balance sheet, you would see how robust it is.

CAR numbers posted is obviously affected by the growth in the loan book in this period, he stated.

“We have grown by about ₦400 billion to ₦450 billion in this short period. As you well know, that is a significant increase.

“We don’t have any concerns as to how these numbers will grow within a year because we have sufficient buffer to be able to withstand an additional growth.

“Given the guidance we have given, a drop of 2% in CAR will be very significant for a bank like Zenith Bank.

“So even though we have a regulatory position at 16%, we are stating that roughly we won’t go below 18% or 19% in the course of the year. So we think we’ll be able to sustain it”.

On quality of loan the lender booked to meet LDR target, Onyeagwu said we’ve continued to emphasize the fact that this LDR is not a call for recklessness.

Zenith Bank spreads into retail lending, says won’t fly M&A for managerial hubris

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