Zenith Bank reveals Ghana bond default affected profits

Key highlights

• Zenith Bank, Nigeria’s largest bank by profitability, reported a profit of N223.9 billion for 2022, down from N244.5 billion in the previous year.
• The bank attributed the profit drop to the haircut taken on Ghana bonds due to the country’s fiscal crisis and subsequent default on foreign borrowing.
• The bank’s impairment on the Ghana bonds impacted its cost-to-income ratio, but despite the challenges, Zenith Bank was still able to maintain a strong performance with gross earnings rising to N921.1 billion and total deposits growing by 38%.

Nigeria’s largest bank by profitability and a member of the Tier 1 Banks (FUGAZ) reported a profit of N223.9 billion down from N244.5 billion reported a year earlier.

The bank blamed the profit drop on the haircut taken on Ghana bonds, as a fiscal crisis forced the West African country to default on its foreign borrowing.

An excerpt of its annual report reveals the bank took a haircut on the Ghana bonds following the default forcing the bank to take an impairment hit.

• “On 14 February 2023, the Group exchanged N123.6bln (GHS 2,675,754,659 ) of its existing Government of Ghana bonds for a series of new bonds with maturity dates commencing from 2027 to 2038 under the Ghana Domestic Debt Exchange Programme. The new bonds were successfully settled on the 21st of February 2023 and have been allotted to the Central Securities Depository. “

Zenith Bank Plc had its Analysts’ earnings call on March 31, 2023, where its CEO and CFO responded to analysts’ questions regarding the bank’s 2022 full-year results. They also responded to specific questions related to the Ghana bonds. 

In his comments, the bank MD/CEO Ebenezer Onyeagwu explained that the bond restructuring led to a “hemorrhage” of the bank’s profits.

• “An unusual economic situation in Ghana that necessitated the restructuring of the Ghanaian debt instrument at the end of the year, which also led to some form of hemorrhage arising from the impairment that needed to be implemented as a result of the re-denomination of the Ghanaian debt instruments.”

A closer look at the bank’s result reveals its Ghana subsidiary posted a loss after tax of N21 billion down from N15.3 billion reported a year earlier.

Nairametrics listened in on the earnings call curating some of the vital feedback given to investors, with a focus on the bank’s exposure to Ghana.

Earnings call excerpt

On the bank’s exposure in Ghana due to impairment: its effects and outlook 

• That the exposure in Ghana is beyond systematic or idiosyncrasy risk but is seen as a sovereign risk as such has implications for the overall market and the players.
• The Ghana issue has to do with the re-denomination of the government-free risk investment and there is no need to apportion blame because, until the time of the re-denomination, the returns on the bonds were quite attractive
• By the re-denomination, the bonds assumed a new identity. Assuming a new identity meant they have been revalued and that revaluation is a one-off thing. It is just a question of recognizing that these instruments have assumed a deteriorated nature and believe the deteriorating nature is not going to continue in the future.
• In terms of effect; in absolute terms, the bank’s impairment loss on financial assets increased by 106%, but if you back out Ghana it would have been much less than that.
• The impairment impacted the bank’s cost-to-income ratio.
• The bank believes that as these instruments have assumed a new status, further deteriorations are unlikely to be there.
• Even with impairment, the bank has strong asset buffers in Ghana. Shareholders’ fund is clearly above the regulatory minimum.

On the bank’s contribution to revenue and PAT. 

• In terms of performance, the bank as a stand-alone would have achieved 103%, but because of the hemorrhage in Ghana, Group-wise performance stood like that.
• But Zenith Bank UK grew by over 315% in profitability. Other subsidiaries have contributed but the bank remains the flagship business of the

Zenith Bank fundamentals still sound

Despite all these challenges, the bank was still able to maintain and deliver a decent very strong performance with the top line growing by 24%.

• Gross earning was just shy of a trillion rising to N921.1 billion during the year up from N736.6 billion a year earlier.
• On a standalone, the bank (without Ghana operations) recorded a year-on-year improvement in profitability by 4%.
• Total deposits grew by 38% and total assets by 30%, notwithstanding the hemorrhage the bank suffered in Ghana as a result of the impairment it had to take on Ghanaian instruments.
• The bank’s deposits grew from N6.4 trillion to N8.9 trillion during the year.