Thursday, August 20, 2015 8:33 am

**Jude Fejokwu**

This is a concise look at Nigeria’s largest bank by deposits (First Bank) and largest bank by assets (Zenith Bank) as at June 30th, 2015. This article will focus on insightful commentary and not a display of the numbers crunched etc.

Zenith Bank is a more profitable bank than First Bank. First Bank’s twelve-month outlook is brighter than that of Zenith Bank. This simply means that First Bank has more of an upside than Zenith Bank from where both banks are presently perched from a portfolio investment and net income growth perspective.

Both banks achieved negative loan value-added as at H1 2015. Zenith had -0.45% and First Bank has -0.55%. Zenith Bank and First Bank achieved +1.88% & 0.93% loan value-added respectively as at FY 2014. Zenith bank’s loan value-added regressed 233 basis points while First Bank’s loan value-added regressed 148 basis points. Loan value-added computed here is my creation. Despite this, Zenith Bank only impaired 20% of its non-performing loans on its income statement relative to First Bank’s 35%.

First Bank’s net loans as at H1 2015 are just 9% more than that of Zenith Bank despite First Bank having 20% more deposits. First Bank added $377m in deposits over the first six months of 2015 while net loans reduced by $465m over the same period. Zenith Bank added $337m in deposits over the first six months of 2015 while net loans increased by $882m. First Bank is slowing down while Zenith Bank is revving things up. Despite the above loan growth, Zenith Bank’s non-performing loans as a subset of assets is still 37 basis points higher than that of First Bank as at H1 2015. This ties into my H1 result commentary on Zenith Bank published last week in which I said its credit impairment provision on its income statement is not realistic given the current realities in my opinion. Zenith Bank’s income state credit impairment relative to non-performing loans is 20% while that of First Bank is 35%. First Bank has stopped to sweep the floor and then move forward while Zenith Bank is trudging forward to the finish line and will probably tidy up properly later.

In continuation of Zenith Bank’s decision to be aggressive in trying times, Zenith Bank received a net debt addition of $544m while First Bank paid a net debt reduction of $399m. Zenith Bank borrowed from others in excess of 60% of what it disbursed to others in the form of loans over the first six months of 2015.

From a profit perspective, Zenith Bank is clearly ahead of First Bank. Zenith Bank’s pre-tax income relative to assets on a two-year average is 55 basis points higher than that of First Bank. In addition, Zenith Bank’s employees are almost 2X more financially productive than First Bank’s employees. In terms of profitability on investments, Zenith Bank’s figure exceeds that of First Bank by more than 60 basis points as at H1 2015.

Despite First Bank having a 20% edge over Zenith Bank in terms of deposits, Zenith Bank still paid out less interest than it received on average (213 basis points less) compared to First Bank. First Bank was taking on more deposits at expensive rates during H1 2015 and lending less! This is clearly not a good recipe for success.

In terms of operational efficiency, Zenith Bank was 350 basis points better than First Bank as at H1 2015. It should be clear by now that Zenith Bank’s edge over First Bank in terms of profitability is driven by conservativeness more than anything else. Financial and operational conservativeness have significantly helped Zenith Bank to dominate First Bank as it relates to the bottom-line.

Both banks are generating the same amount of business on average across the Nigerian and African banking landscape.

As at December 31st, 2014, Zenith Bank utilized its debt significantly better than First Bank. Six months later, First Bank improved while Zenith Bank worsened and First Bank has now utilized its debt better than Zenith Bank as at H1 2015. Zenith Bank was 119 points better and is now 52 points worse than First Bank over the first six months of 2015. This is another creation of mine.

First Bank has more non-earning assets on its books than Zenith Bank. First Bank is more highly leveraged (8X) compared to Zenith Bank at 7X despite Zenith Bank’s aggressive borrowing during H1 2015.

From a value perspective, Zenith Bank is trading at approximately 1X book value while First Bank is trading at approximately 0.4X book value.

In terms of lending, I will deem First Bank to be a bit restrained while Zenith Bank was a bit rambunctious during H1 2015. Overall, First Bank is acting cautious while Zenith Bank is acting confident. First Bank needs to take a critical look at its human capital in terms of depth. It has the resources to deliver above average returns, but has failed to do so satisfactorily thus far. A lot of its current situation boils down to poor or wrong decision making of its employees relative to Zenith Bank.

In terms of quality of earnings, I believe Zenith Bank should have provisioned double what it actually did and First Bank booked more interest income and less interest expense on its income statement than it actually received and paid respectively totaling $43m.

In the short term (now till the end of FY 2015,) Zenith Bank appears more palatable from an RoE and RoA perspective. In terms of the potential for less negative surprises going forward, I will go with First Bank. In terms of more futuristic upside from a portfolio investment perspective, I will go with First Bank. Enough said; back to you.

*You can read more insights by Fejokwu @ http://judefejokwu.blogspot.com

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