Zenith Bank: Moderate recovery sustained in Q3

Zenith Bank stayed on the profit recovery track at the end of its third quarter operations but progress remains modest. The bank’s cost-income relationship shows a thin line between a likely moderate profit recovery and a possible slip into another year of decline. Profit had declined by 8.6% last year and the current growth momentum isn’t strong enough to match the bank’s over N100 billion net profit high attained in 2012. Decelerating revenue and inability to improve profit margin stand in the way of strong profit recovery and growth for Zenith Bank in 2014.

Mr. Peter Amangbo, who has just taken over the headship of the bank, appears to be starting well at least with a chance for a moderate profit recovery. Investors are full of expectations of him to fire up the bank’s growth engines going forward. His ability to step up profit growth will depend on how far he can go to keep the cost-income ratio as low as it was in 2012.

For now, rising interest expenses isn’t letting him to keep costs down and stretch out profit margin. He has managed to counter the impact of a sharp growth in interest cost with a drop in provisions for credit losses so far this year. Even the moderate profit recovery hopes this year depend on his ability to prevent credit losses from rising in the final quarter.

The bank closed its third quarter operations with gross earnings of N273.74 billion, which is an increase of 7.2% year-on-year. If the current growth rate is maintained to full year, the bank is expected to close with gross income in the region of N367 billion. This will be a moderate improvement of 4.4%, representing a sharp slowdown from the growth of 14.5% in the preceding year.

Revenue weakness this year is coming from fee and commissions income, which dropped by 4.5% to N34.85 billion in the third quarter. The slacken revenue performance is confirmed by a decline in asset turnover from 0.11 at the end of last year to 0.08 at the end of the third quarter. This means the bank’s assets aren’t yielding as much revenue as they did in the preceding year.

The bank improved after tax profit by 5.6% to N71.05 billion year-on-year in the third quarter. The current growth rate indicates an after tax profit of N95.6 billion for Zenith Bank at full year. This will be a moderate recovery of 4.4% from last year’s closing figure.

The moderate profit growth expectation reflects the slowing down in revenue growth and the inability to improve profit margin. At 26%, net profit margin is unchanged from the 2013 closing level. It is nevertheless one of the highest net profit margins in the banking industry.

The ability to defend profit margin came from a drop of 17.8% in impairment charge for credit losses. That enabled the bank to counter the effect of a sharp growth of 34% in interest expenses at the end of the third quarter. The rise in interest cost is against a flat growth in customer deposits, indicating an increase in the average cost of funds.

Much of the 11.5% increase in interest income was devoted to settle increased interest expenses and only a marginal improvement of 3.2% was recorded in net interest income during the review period. Had it not been for the drop in loan loss provision, the improvement in revenue could not have covered the 6.4% increase in total operating expenses.

Further support of the bottom line came from a slight moderation in operating cost, which resulted in a slight decline in the operating cost margin at 41.1% in the third quarter. This represents one of the lowest operating cost margins in the banking industry.

The critical action points for Amangbo are the decline in asset turnover and the significantly increased claim of interest expenses on revenue. He retains the strength to convert revenue into profit but needs to reclaim the ability to convert assets into revenue. A more aggressive push on revenue and a little firmer hold on interest expenses will step up profit growth in the final quarter. In the event that increased provisioning for credit losses has to be made in the last quarter, the bank’s full year profit will be less promising than forecast.