Zenith Bank Plc controls 15% of Nigerian banking assets, according to Fitch Rating’s recent report, following efforts to deepening footprint in the retail segment of the market. For the Nigerian banking system, size is a strategic advantage, helping financial services operators in market positioning.
In the local bourse, the bank outrun GTCO as the most valuable brand in the financial service sector, the market valuation settled at about N680 billion on Friday.
In the rating note released recently, Fitch said it affirmed Zenith Bank Plc.’s Long-Term Issuer Default Rating (IDR) at ‘B’ with a stable outlook. Meanwhile, separate equity analysts’ projections indicate growth momentum will be relatively strong in the financial year 2022.
A slew of equity analysts is expecting the most capitalized bank in Nigeria to deliver higher earnings and returns for shareholders following a fast and furious 150 basis points interest rate hike by the monetary authority.
Fitch also affirmed Zenith’s National Long-Term Rating at ‘AA-(nga)’ and Viability Rating (VR) at ‘b’, according to the rating note, driven by its standalone creditworthiness.
The global rating firm explained in the note that the Bank’s VR reflects the constraint of Nigeria’s challenging operating environment and the bank’s high exposure to the Nigerian sovereign.
Zenith’s National Ratings are driven by its standalone strength, according to the rating note. They are at the higher end of the scale, reflecting Zenith’s comparatively strong domestic franchise and financial profile.
Fitch said in the report that rising global risks will weaken domestic operating conditions. It noted that headline inflation which surged to 17.71% in May from 16.8% in April 2022 is expected to remain stubbornly high, posing downside risks to real GDP growth forecasts of 3.1% in 2022 and 3.3% in 2023.
However, the rating note added that downside risks are somewhat mitigated by strong oil prices, which should also underpin growth in non-oil sectors and banks’ asset quality. Zenith is Nigeria’s second-largest banking group, representing 15% of domestic banking system assets at the end of the financial year 2021.
The bank has a strong corporate banking franchise and a retail-focused strategy through digital channels, the rating note said, adding that revenue diversification is strong, with non-interest income representing 48% of operating income in 2021.
In Zenith bank, credit consideration is adjudged moderate while its single-borrower credit concentration is moderate, with the 20 largest customer loans representing 68% of Fitch Core Capital at the end of 2021, according to the rating note.
Heavy interest in Oil and gas exposure was spotted and Fitch analysts see this is material, representing 22% of gross loans in the financial year 2021.
It said the bank’s aggressive loan growth may lead to asset quality weakening as the loan book seasons. However, the rating note indicates that asset quality is improving based on its first-quarter result.
Zenith Bank’s stage 3 loans ratio decreased to 4.2% at the end of the first quarter of 2022 from 6.4% in 2020 on the back of high loan growth, write-offs and reclassifications.
Stage 2 loans which accounted for 22% of gross loans at the end of the first quarter in 2022 remain high but are concentrated within the oil and gas sector and therefore expected to benefit from high oil prices, the rating note stated.
“Our asset quality assessment also considers a substantial amount of non-loan assets, largely comprising government securities and cash reserves at the Central Bank of Nigeria”.
In terms of profitability, the rating note considered Zenith Bank’s position in the market as sturdy following a year-on-year increase in performance. Operating returns on risk-weighted assets have averaged 5.8% over the past four full years.
Reflecting its core business strategy, the bank’s earnings have been noted to be supported by a low cost of funding, strong non-interest income and manageable loan impairment charges.
However, profitability has weakened in recent years due to the collapse of fixed-income yields and increased cash reserve requirements, but we expect it to improve with rising interest rates and an improving customer deposit structure.
Zenith bank ranks higher in terms of capitalization, printed at miles above regulatory requirement for an international banking license, with operation driven by a balance sheet with low leverage.
In the rating note, Fitch said regulatory capital ratios exhibit material buffers above minimum requirements and it expects Zenith Bank to comfortably comply with impending Basel III capital requirements.
It said the bank’s pre-impairment operating profit is strong – 10% of average gross loans in 2021 – providing a large buffer to absorb loan impairment charges without affecting the capital.
Low balance sheet leverage is helped by the bank’s equity capital position and current and saving account (CASA) mix, according to its latest financial statements.
Funding is mainly through a stable and inexpensive customer deposit base, comprising a high percentage of current and savings accounts, printed at 93% at the end of the first quarter in 2022, with large volumes sourced from individuals and SMEs.
For the bank, single-depositor concentration remains very low while liquidity coverage is comfortable in local and foreign currencies, according to the rating note