Zenith Bank H1 2015: I had a rise and then a thump

Dear Africa Interested Individuals:
                                                        We take a look at the latest earnings from the largest bank in Africa's largest economy.  The same bank where the Central Bank Governor of Nigeria was sourced from and the Governor of Akwa Ibom State was Zenith Bank's former CFO.  Let us get to it, starting with key observations.  

  1. Zenith Bank did not experience a lull in activity that characterized some other banks as at H1 2015.  Non-interest income grew by $79.1m relative to net interest income (post-impairment) that grew by $48.9m year-on-year. Non-interest income growth is 62% higher than post-impairment net income growth.  Customers are transacting more with the bank at least in terms of value of transactions despite the tighter business environment. 
  2. Gross loans increased by 10.4% which equates to an increase of $914.2m over the first six months of 2015.  
  3. Contingent liabilities are 74% of total assets; in simple terms, the bank has put liabilities(of some sort) off-balance sheet that equates to 74% of total assets on-the-balance sheet.  Anything from 20% above is too much in my opinion.  Most of these items could have very well been put on the balance sheet if management so desired.  This reveals excessive optimism by the bank and reluctance to take a more balanced view of its business environment.  Remember, that this is Nigeria's largest bank. 
  4. The bank's leverage increased from 6.8X to 7.1X over the first six months of 2015.  Total debt rose by 30% ($544m) over the first six months of 2015.  Gross earnings rose by only $223m from July 1st, 2014 - June 30th, 2015.  The bank borrowed 2.4X (in six months) what it earned in twelve months.  Zenith Bank is debt burdened.  Its debt level is 86% of its equity level as at H1 2015.  This is double my debt safety threshold level. Debt increase is 59.5% of gross loan increase over the first six months of 2015.       
  5. The key boost to non-interest income were: foreign withdrawal charges, loan fees, corporate finance fees, treasury bill trading and foreign currency revaluation gain.  
  6. Collective loan impairment allowance is 88% more than specific impairment allowance.  This is never a good sign as it relates to a bank's judgment of its asset quality.  Impairment allowance on overdrafts is almost double that of term loans that are double the amount of overdrafts.  Zenith Bank made a fresh impairment of $36m on its income statement during H1 2015.  Overdraft impairment exceeds term loans impairment on the income statement.  Zenith banks is pretty much saying that it is having more difficulty in recovering money it gave to customers in excess of their current account balances to meet payments rather than term loans.
  7. Zenith Bank is still being aggressive (unlike some other banks I have discussed.)  Placements/deposits with other banks reduced by $113.85m and gross loans to customers increased by $914.2m.  
  8. The bank applied caution in some areas.  Current account balances with banks increased by $18.8m over the same period while placements reduced by $113.85m.  Unsecured loans reduced by 68% over the first six months of 2015.  
  9. 51% of the bank's term loans are due within twelve months.  This increases risk of default in my opinion and puts customers under extreme repayment pressure.  
  10. The debt the bank has borrowed ($2.34B) is not being used optimally; on an absolute and relative basis.  First Bank and Diamond Bank are doing better in this regard as at H1 2015.  
  11. As at H1 2015, Zenith Bank (based on the formula I created and have applied extensively) is not getting value-added from its loan book.  It achieved value-added from its loan book as at December 31st, 2014.  
Kindly note that the bank has announced this H1 2015 result as audited.  This is not an audited result in my opinion.  The income statement (the optics sheet) and cash flow statement are unaudited.  Only the balance sheet was audited.  Nigeria, once again standing out...

 Time to close this out.  Overall, business is improving for the bank in a tighter business environment.  Its non-loan business has significantly improved.  Overall, the income being made on loans (factoring in the increase in monetary policy rate by 100 basis points in November 2014) is fairly stagnant despite the 10% increase in gross loans during H1 2015.  The bank has not fully come to terms with the exact state of its asset quality.  The bank is spending more time dealing with today and less on tomorrow.  This has paid off for the bank thus far as net income grew by 12% year-on-year.  Zenith Bank has had a good performance; this has been reflected as better in my opinion as asset quality has more theoretical than practical quality as portrayed.  Zenith is Nigeria's largest bank; we will have to wait till the end of 2015 to determine if it will remain the most profitable.  I expect RoE to come in at 20% approximately.      

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