A REPORT PRESENTED BY KPEYA QUEEN AND BEZANKENG MARVEL ON THE ANALYSIS OF THE

BANKING INDUSTRY WITH ZENITH BANK AS CASE STUDY FOR INVESTMEN

INTRODUCTION

The banking industry is one of the oldest industries, deregulation has opened up many new businesses
to the banks with technological developments like E- Banking and ATM. The banking industry is trying to
bring some brilliance, glamour and intelligence into the system.

Bank stocks are very difficult to analyse because many banks hold billions of dollars in assets and
have several subsidiaries, another reason is the length of their financials which may be over 100- pages.

An important thing to note about the banking industry is the Governments heavy Investment in it.
The Government set the following in a banking system;

 Restriction on borrowing limits

 Restriction on amount of deposit a bank must hold in vault
 They also have a huge influence on a bank’s profitability

TYPES OF BANKS

There are basically two types of banks which are;

1. Regional and Thrift banks: They are small financial institutions whose primary focus is onone
geographical area within a country.
2. Major or Mega banks: these are banks whose main scope is the financial centers where they get
involved in international transactions though they may maintain local branches

IMPORTANCE OF BANKS

 Transfer Risk
 Provide Liquidity
 Facilitate both minor and major transactions
 Provide financial information to both businesses and individuals.

There are some things a bank’s management must look into in order to decide on; loans to extend,
whom to give loans to and what rates to set. They include;

 Capital Adequacy and the role of capital

 Asset and Liability management
 Liquidity
 Asset Quality
 Profitability
 Interest Rate Risk

KEY RATIOS AND TERMS USED IN BANKING

1. Interest rate: Interest rate is the rate the bank places on loans, it directly affects the credit
market hence banks must constantly try to predict the next interest rate moves
2. Gap : This is the difference over time between assets and liabilities, it could be a negative or a
positive gap. A negative gap indicates higher liabilities than assets while a positive gap indicates
higher assets than liabilities. Banks with positive gap benefit from increased interest rate.
3. Capital Adequacy: A bank’s capital or equity is the margin by which creditors are covered if the
bank has to liquidate assets. The capital/assets relation is a good measure of a bank’s health
which by law requires to be above a prescribed minimum

Current minimum capital adequacy ratios

 Tier 1 capital: It absorbs losses without a bank being required to cease trading, it includes
equity capital and disclosed reserves. It should not be lower than 4%
 Tier 2 capital: This capital can absorb assets in the event of a winding up, it provides less
protection to depositors, it includes; disclosed reserves, general loss reserves and
surbordinated term dept.
 Total Capital: this is a combination of tier 1 and 2, it must not be less than 8%
4. Gross Yield on earning asset( GYEA): It tells the yields from invested capital /assets
5. Rates paid on Funds (RPF): Is the average interest rate paid on borrowed funds
6. Net Interest Margin(NIM): It is the average interest margin the bank receives for borrowing and
lending funds

THINGS INVESTORS MUST CONSIDER ABOUT A BANKS MANAGEMENT

 Interest rate fluctuations: This plays a huge role in the profitability of a bank. Banks therefore
breakup the revenue figures into fee-based(non-interest) and non- fee-based(interest)
generated revenues. Firms with higher fee- based revenue will earn a higher return on assets
than competitors.
 Net Interest Margin: Look at the past NIM across several years to determine its trend, for most
banks it ranges between 2-5%. However, just a 0.1% change from the previous year means a
great change in profit
 Return on Assets: We must take note that banks are highly leveraged hence a 1%ROA indicates
huge profit
 Operating Expenses: They should either remain the same or decrease, but if they increase there
should be a corresponding increase in revenue
 USING PORTERS 5 FORCES TO ANALYSE THE BANKING INBUSTRY

1. THREAT OF NEW ENTRANTS: The average person cannot come along and start up a bank but
there are services such as internet bill payment on which entrepreneurs can capitalize. Banks
are fearful of being squeezed out of the payment business because it is a good source of fee-
based revenues, another trend that posses a threat is companies offering other financial
services. The possibility of a mega bank entering into the market poses a real threat .
2. POWER OF SUPPLIERS: The suppliers of capital might not pose a big threat but the threat of
suppliers luring away human capital does.
3. POWER OF THE CUSTOMERS: The individuals do not really pose much threat to the banking
industry but one major factor affecting the power of a customer is a relatively high Switching
cost. If a person has a mortgage, car loan, credit card, checking account and mutual fund with
one particular bank, it can be extremely tough for the person to switch to another bank. In an
attempt to lure in customers, banks try to lower the price of switching but many people would
still rather stick with their current banks.
4. AVAILABILITY OF SUBSTITUTES: As you can imagine, there are plenty of substitutes in the
banking industry. People offer a suite of services over and above taking deposits and lending
money. There are non-banking financial service companies that can offer similar services, on the
lending side of the business, banks are seeing competition rise from unconventional companies.
5. COMPETITIVE RIVALRY: The banking industry is highly competitive. The financial service industry
has being around for hundreds of years and just about everyone who needs banking services
already them, because of this banks must attempt to lure clients away from competitor banks,
they do this by often low financing, prefered rates and investment services. The banking sector
is in a race to see who offers the best and fastest service but this leads to low return on assets.
 CASE STUDY: ZENITH BANK NIGERIA

RATIO ANALYSIS OF ZENITH BANK NIGERIA FOR 2015 AND 2014 FINANCIAL YEAR

( All figures in million naira)

We will use the following ratios to analyse the performance of zenith bank Nigeria;

 Capital Adequacy Ratio: The capital adequacy ratio of Zenith Bank Nigeria for 2015 is 20% which
is greater than the stated minimum of 8%, since capital adequacy ratio is a good measure of a
banks health, then the bank is in good financial health and is worth investing in.
 Gap: The total liability of the bank was greater than the total assets for the year 2015 with a
difference of 663252, therefore it is a negative gap and this implies an increase in interest rate
will be detrimental to the bank
 Net Interest Margin: The NIM of the Zenith bank for 2014/2015 is 2.5%, hence there was a great
increase in profit, which is an advantage to investors.
 Return on Assets: there is a 2.8% return on assets in the year 2015 which indicates a huge profit
since its above the minimum of 1%
 Operating Expenses: Comparing the operating expenses of 2014 and2015, there is an increase of
15383 which is not very healthy for the bank, but there is also a corresponding increase in
operating income of 29725 which surpports the increase in operating expenses
 Interest Rate Fluctuations : The non-interest income of Zenith bank is less than the interest
income hence they will earn a lower return on assets as compared to competitors
 Profitability: The profit of Zenith bank increase from 47445 in 2014 to 53187 in 2015, hence
there is a substantial growth in the enterprise and investors have high possibility of obtaining
dividends if they invest in the company.