Zenith Bank cuts cost of funds to defend profit in Q3

Zenith Bank Plc defied a generally rising cost of funds in the financial markets and cut interest expenses by close to N20 billion at the end of the third quarter operations in September 2021.

The huge cost saving provided the bank the saving grace to absorb rising credit losses and operating expenses and push profit slightly up to the region of N161 billion at the end of the nine months of trading.

At N74 billion, interest expenses went down by roughly 21 percent year-on-year, which is a sustaining drop in cost of funds for the bank for the second year. Interest expenses claimed a reduced proportion of interest income at 24 percent compared to over 29 percent in the same period last year.

The cost saving from the drop in interest expenses is the singular reason why Zenith Bank prevented profit from dropping at the end of the third quarter. Cost increases from loan impairment and operating expenses far exceeded the improvement in revenue over the review period.

Gross income grew by about N10 billion year-on-year at the end of September – just a fraction of a combined increase of about N26 billion in operating and loan impairment expenses during the period.

The bank recorded an increase of19 percent or N22 billion year-on-year in general operating expenses to N137 billion, more than twice the gain in revenue for the bank during the period. It also recorded a loan impairment charge of about N29 billion, representing a year-on-year growth of 15 percent or close to N4 billion.

Spurred by general operating expenses, total operating cost rose by 11.5 percent year-on-year to about N219 billion over the review period. It claimed 42.2 percent of gross earnings at the end of September compared to 38.5 percent in the same period last year.

There was a major upsurge in loan impairment expenses within the third quarter from a little over N1 billion in the same quarter in 2020 to N9 billion in the third quarter of this year. This caused a major change of direction from a drop of over 17 percent in loan loss charges at half year to the increases recorded at the end of the third quarter.

The bank’s revenue performance continues to face constraints in the main income line of interest earnings. Interest income continues to decline while transaction income made up for the loss of interest earnings and accounted exclusively for the increase in gross income at the end of the third quarter.

Interest income went down by 3 percent year-on-year at the end of the third quarter, slowing down however from 11 percent drop in the first quarter and 6 percent decline at half year. Zenith Bank closed the third quarter operations with interest income of about N309 billion.

Net fee and commission income is the revenue growth driver for the bank this year with an increase of over 32 percent year-on-year to over N78 billion at the end of the third quarter. This represents an increase of over N19 billion during the period.

The increase in fee and commission income covered up all revenue losses in other income lines of the bank and accounted to the moderate overall increase at the end of the third quarter. It changed the narration from a marginal decline in gross earnings at half year to an increase of about 2 percent at the end of the third quarter.

Zenith Bank closed the nine-month operations is September 2021 with gross earnings of roughly N519 billion. Gross earnings had decelerated last year from about 7 percent increase in 2019 to 5 percent and a further slowdown looks quite likely for the bank at the end of this year.

The strength in the bank’s earnings story so far this year is the big cut in cost of funds, which has sustained it on the course of raising net interest earnings while interest income remains down.

Net interest earnings amounted to roughly N235 billion at the end of the third quarter operations, which is an improvement of 4 percent year-on-year. It sums up to cutting from depositors to keep up the wealth of shareholders.

Zenith Bank posted an after tax profit of N160.6 billion for the nine months of operations in September 2021, slightly improved from over N159 billion in the same period last year.

The ability to defend profit reflects the ingenuity of the bank’s management to extract cost saving from interest expenses to cover up increases in loan impairment and operating expenses.

Depositors hold the biggest stake of N6 trillion in the N8.7 trillion bank while shareholders’ stake stand at about N1.2 trillion in equity resources.