Zenith Bank: Cost-saving measures bolstered profit in 2020

Zenith Bank Plc rode on the back of cost-saving measures to grow profit ahead of revenue in 2020, with two major expense lines providing the result that reinforced profit performance. These are interest and tax expenses.

Interest expenses dropped by over 18 percent to N121 billion at the end of the 2020. This represents a drop of as much as N27.5 billion over the review period. With the drop in interest expenses, net interest income grew by 12 percent to close at N300 billion at the end of the year.

Tax expenses dropped at an accelerated rate from 10 percent in 2019 to over 26 percent in 2020. The strong drop in tax expenses is the critical factor in the profit improvement that Zenith Bank achieved at the end of the year.

The bank saw a tax saving of over N9 billion to grow the bottom line in 2020. The bank recorded a drop in tax expenses for the second year at an accelerated rate, leading to the lowest tax expense in five years. This doubled a 5 percent growth in pre-tax profit to a 10 percent growth in after tax profit for the year.

The bank’s audited accounts for the 2020 financial year shows an outstanding growth in the size of the balance sheet to the tune of 34 percent, closing the year with an asset base of N8.5 trillion. However the big asset expansion did not lead to a matching growth in earnings figures in the year.

Gross earnings improved by only 5 percent to stand at N696 billion at the end of the year. This is a slowdown from about 7 percent increase in revenue in 2019. Zenith Bank has not been able to recover fully from a drop of 17 in gross earnings in 2018. Its closing revenue figure for 2020 remains well below the 2017 peak earnings figure of N745 billion.

Inability to grow earnings alongside the rapid asset expansion was a major drawback for Zenith Bank on the side of earnings performance in 2020. Interest income, the biggest revenue source of the bank, was only marginally improved at 1.3 percent to N421 billion. Interest earnings had declined over the preceding two years.

There was a major drop in net fee and commission income to the tune of 21 percent to close at N79 billion. Trading income only stepped up by 3 percent to about N122 billion at the end of the year.

Other income provided the strength for revenue improvement in the year, rising more than three and half times to the region of N51 billion at the end of the year.

Full year operations ended with an after tax profit of N230.6 billion for Zenith Bank, which is a year-on-year growth of 10.4 percent. This is a step up from the 8 percent profit improvement the bank recorded in 2019.

Net profit margin improved from 31.5 percent in 2019 to 33.1 percent at the end of 2020. The ability to defend and improve profit margin is the key strength of Zenith Bank that has kept profit growing while revenue stays below the previous peak.

Rising loan default risk presented a challenge to the bank’s management for the second year in 2020. Loan loss expenses grew by 64.5 percent to N39.5 billion at the end of the year.

Total operating expenses also grew ahead of revenue at 10.5 percent to N256 billion at the end of the year compared to the 5 percent increase in gross earnings. The bank devoted 37 percent of gross earnings to operating expenses in the year, the highest cost margin in the past five years.

Zenith Bank closed the 2020 financial year with a balance sheet size of N8.5 trillion. This is dominated by loans and advances of N2.78 trillion, which grew by over 20 percent at the end of the 2020 financial year.

Cash and bank balances expanded by 70 percent to about N1.6 trillion and led the asset growth in the year. Investment securities also grew by 69 percent to over N997 billion at the end of the year.

Lending to other banks of over N810 billion raises the bank’s net loans and advances portfolio to N3.6 trillion at the end of the year.

The bank’s asset expansion was financed largely by an increase of over N1 trillion in customer deposits or 25 percent to close at N5.3 trillion at the end of December 2020. Other major financing sources include borrowings, which rose by 170 percent to N870 billion and other liabilities, which expanded by 93 percent to N703 billion over the period.

Zenith Bank earned N7.34 per share at full year in 2020, improving from N6.65 per share in the preceding year. It has announced a final cash dividend of N2.70 per share, up on an interim cash dividend of 30 kobo per share.