Zenith Bank: Defending profit and shareholder wealth

Zenith Bank’s earnings story at the end of the third quarter operations in September 2018 is that management is succeeding to build profit and shareholder wealth from a sustaining drop in gross earnings. All the bank’s main income lines were down at the end of the third quarter, leading to a drop of 11% in gross earnings year-on-year. That was however an improvement from a drop of 15% in revenue at half year, as trading income, which is leading the revenue fall this year, strengthened up a bit during the third quarter.

The bank’s management continued to engage shock absorbers on the side of cost to shield profit from the declining revenue. The drop in gross earnings meant a loss of nearly N57 billion in revenue year-on-year. This was more than compensated by a cut down on two major cost lines– interest expenses and loan impairment charges, which saved more than N83 billion for the bank. With that, management was able to raise profit by over 11% from 11% drop in revenue.

Gross earnings amounted to N471.61 billion for Zenith Bank at the end of September, a drop of 11% year-on-year. Trading income remained on a reversed performance this year, dropping by 35% against a 456% leap at the end of last year. Its contribution to gross earnings has dropped from over 21% in 2017 to 11% at the end of the third quarter.

Interest income, the main revenue line of the bank, is also down by 6.3% to N339 billion over the review period. All the other income lines also recorded year-on-year declines at the end of the third quarter.

Zenith Bank had grown revenue by about 47% to over N745 billion in 2017. Based on the performance at the end of the third quarter, gross earnings projection is revised down to the region of N640 billion for Zenith Bank at full year. This indicates a likely revenue drop of 14% at the end of the year.

The reversed direction of revenue is countered by equally reversed movement in two major cost elements. Interest expenses continue to reverse its position of 50% upsurge last year to a 31% drop to N110.5 billion at the end of the third quarter. The impact of that was an increase of over 13% in net interest income to N228.52 billion. This afforded the bank a cost saving of about N50 billion from interest expenses.

The second cost saving came from impairment charges for credit losses, which dropped by almost 70% to N14.34 billion over the period. This is a reversed movement from the upsurge of 204% in loan loss expenses experienced last year. The bank saved another 33 billion from the drop in loan impairment charges. The charges had consumed over 38% of net interest income last year. The ratio fell to 6% at the end of the third quarter of this year.

Operating expenses grew by 6.5% to over N182 billion at the end of September and therefore claimed an increased share of gross earnings at 38.4% compared to 32% in the same period last year. This means part of the cost saved was claimed by increased operating cost during the period.

A greater part of the cost saved flowed down to the bottom line, jerking up after tax profit by 11.6% to N144.18 billion at the end of the third quarter. This indicates increased ability of the bank’s management to convert revenue into profit, as net profit margin went up from 24.2% in the same period last year to 30.4% at the end of September 2018.

The drop in interest income continues to reflect the trimming of loans and advances to customers. The bank’s credit portfolio went down by 13% to about 1,825 billion at the end of the third quarter from the closing figure last year – the lowest customer lending figure since 2015. This is a sustaining drop so far this year with a further cut of nearly N50 billion from the closing figure of N1,873 billion at half year.

Saving cost to level up drops in revenue lines and grow wealth for shareholders despite instability in the business space is the summary of Zenith Bank’s performance at the end of the third quarter of 2018. The bank closed the period with earnings per share of N4.58, improving from N4.11 per share in the same period in 2017. It earned N5.66 per share at the end of last year.

The bank paid an interim cash dividend of 30 kobo per share to shareholders at the end of half year trading. It is likely to improve its last year’s total cash dividend of N2.70 per share at the conclusion of its 2018 operations.