By Nkiruka Nnorom
ZENITH Bank Plc just released its 2016 financial result, showing significant improvements in all key indices. How do you view this result in view of the backlash of the economic headwind suffered by most businesses last year?
The bank is a very liquid bank and you can see the gross earnings grew mainly on account of net interest income. In an environment where interest rate is rising; any liquid bank will benefit from it. Treasury bills rate has gone up significantly, starting from half year 2016, on account of high inflation rate, and that also followed the interest rate in the market. Banks that are very liquid took advantage of that and that was reflected very greatly in the interest income that the bank made.
Although fees and commission income increased marginally, trading income and other income received a boost. The impairment charge on financial assets increased but the bank was able to manage operating expenses despite the difficult operating environment. All these accounted for the bottom-line you see in the bank.
Other banks will be due to release their results in the next couple of weeks. Do you see them performing as well as Zenith did.
Not all of them will do well; if you look at the performance of Zenith Bank, you will realize that they didn’t have so much of impairment. Even the impairment charge increased actually, but in terms of the absolute number compared to loan portfolio they have, it is quite insignificant.
Traditionally, that has been the trend because they are very strict with the loan portfolio and in trying to ensure that they have very good asset quality. Their non-performing loan was quite low. When you look at what happened in other banks, they have huge provisions; that will impact on them.
Again as I mentioned earlier, in an environment whereby you have rising interest rate, banks that are net borrowers from the market will have substantially high interest expenses. Zenith Bank is a net placer of funds in the market and in an environment whereby you have high interest rate, a net placer of funds will benefit from the rising interest and that is the case with Zenith Bank. So, this is not what we are going to see in other banks when they release their results.
In an environment where funds are sterilized by the CBN, Zenith Bank was able to achieve loan growth of 15.08 per cent. What do you make of this and does that indicate favourable disposition to real sector lending by banks?
Well, 15.08 per cent growth in loans and advances when inflation rate is at over18 per cent is actually in real terms a contraction. For instance, if you were doing business last year, the cost of running businesses between December 2015 and December 2016 has gone up more than 45 per cent.
Therefore, if a company borrowed money to fund its transaction from a bank, it means that it will need additional fund of over 45 per cent to enable it maintain the same level of production. However, the loan increase of Zenith Bank is just an increase of about15 per cent.
This means that the company has not done as much business as it was doing the previous year. When inflation this year is about 18 per cent and you grow your loans portfolio by 15.08 per cent, it is a contraction in real terms. In addition, the growth in the loans may also be attributed to the effect of the devaluation of the Naira.
This is because if a bank has a dollar denominated loans that was converted to Naira in the year 2015 at about N198 per dollar, now the same loan would be converted to Naira at over N300. Therefore a bank with a loan of $1 billion in 2015 would carry about N198 billion in its Naira balance sheet as the value of the loan. But the same loan will now be worth over N300 billion in its balance sheet without any actual increase in loan.
Thus 15 per cent growth in loan in an environment where you have high inflation rate and almost double in devaluation is not a growth at all. However, one of the things we must note also is that the primary business of banks is to lend, to intermediate between the surplus sector and deficit sector.
Agriculture has been growing and a lot of banks have been doing a lot with agriculture. Government also borrows money from the market; they lend money to them. Contractors also borrow. So, some sectors of the economy are still doing well and we have an increase in trade. These are areas that banks are still lending. But 15 per cent is not growth given the rise in inflation rate and the impact of the devaluation on banks’ loans growth.
Zenith is also proposing N1.77k final dividend for the year. What do we expect from other banks?
We need to look at these companies individually. If we are saying dividend for all of them, I don’t expect that Unity Bank will pay dividend; I don’t expect that Skye Bank will pay dividend. A number of these banks will pay lower than what they paid in the year ended 2015, because their performance will not be as high as that this year.
Zenith Bank, yes, the performance is higher than that of 2015, though if you look at dividend they are paying now in real term it is actually lower. But then, let’s leave that, but in the nominal term, yes, it is higher. FBN Holding paid 15kobo dividend in the year 2015 because of the high non-performing loans, but we expect it to pay higher for the year ended 2016.
So if First Bank pays slightly higher than what it paid last year, we can understand that, but not all of them would be able to pay higher dividend in 2016 than in 2015 because last year was not particularly very good for most companies. If you look at the account of GTB, in nine months ended September 2016, it made about N140 billion Profit Before Tax (PBT).
Out of that, the bank made about N98 billion from foreign exchange revaluation gains. The only thing remaining is about N47 billion. So you see that in this instance again, the performance was not as good as what the bank did in the previous year. Generally, I do not expect all of them to pay because 2016 was a very challenging year for all of them.
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