Zenith Bank: Expect a new profit high despite rising credit losses

Zenith Bank is headed for a new profit high at the end of 2015, sustaining a rebound it registered last year. The bank however has to contend with two major rising costs that are slowing down profit growth. Its profit had declined in 2013 from the all time peak of N100.15 billion in 2012 and a recovery in 2014 still fell a little short of the 2012 peak.

The bank has stepped up growth in both gross earnings and profit this year and is expected to finish the year with stable growth in both. Based on the current growth rate, Zenith Bank is likely to show one of the biggest revenue volumes among listed companies and the biggest profit figure in the banking sector. After a big leap in 2012, the bank has since held the position of the largest profit earner in the Nigerian banking industry.

The bank grew gross income by 23.1% year-on-year in the third quarter but this is likely to slow down to about 13% at full year. There is a balanced growth in both interest income and fee-based earnings, particularly as the bank is now rebuilding investment assets that have been declining for a while.

Profit isn’t growing as fast as revenue at 17% in the third quarter and this is explained by two key expense lines that are growing ahead of gross earnings. These are impairment charges for risk asset losses, which doubled at the end of the third quarter to N9.72 billion and interest expenses, which also grew well ahead of revenue at 37%. Operating cost however moderated and claimed a reduced share of revenue, which enabled the bank to dilute the overall cost behaviour.

The bank lost profit margin on year-on-year basis from 26% to 24.7% at the end of the third quarter, which is still at par with the closing net profit margin in 2014. This means the bank retains the strength to grow profit this year and with growing revenue, an accelerated growth in profit is to be expected from Zenith Bank in 2015.

The bank closed the third quarter trading with gross earnings of N336.85 billion, representing an increase of 23.1% year-on-year. Based on the third quarter growth rate, we project gross earnings of N454 billion for Zenith Bank at the end of 2015. This would be an increase of 12.6% over the 2014 full year revenue figure of N403.34 billion against the increase of 14.8% in 2014.

Revenue structure this year shows a balanced growth in interest and non-interest incomes. Interest income however remains the bank’s major source of revenue, amounting to N256.74 billion at the end of the third quarter. Revenue growth has slowed down over the past two years for the bank from a five-year average of 20.4%.

Profit after tax amounted to N83.09 billion for Zenith Bank at the end of the third quarter. This represents a growth of 16.9% year-on-year. Based on the growth rate in the third quarter, we project a net profit of N112 billion for Zenith Bank at the end of 2015. This would be an accelerated growth of 12.6% over the full year net profit figure in 2014. It will also represent a new profit high for the bank ahead of the N100.68 billion height attained in 2012. The bank had improved after tax profit by 4.3% in 2014.

The bank is expected to grow profit at par with revenue at the end of the year, which is a unique strength in an environment of generally declining profit margin. The bank is applying cost moderation in operating expenses to counter rising interest expenses and impairment charges for loan losses.

Interest expenses continue to rise far ahead of interest income at 37% in the third quarter compared to 20.5%. The bank is therefore devoting an increasing proportion of revenue to interest expenses. At the end of 2014, interest cost claimed 34.1% of interest income and 26.5% of gross earnings. These ratios have increased further in the current year to 37.5% and 28.3% respectively.

The other major rising cost line is impairment charge for loan losses, which nearly doubled on year-on-year basis to N9.72 billion at the end of the third quarter. Impairment charges are therefore rising rapidly this year from the 18% growth recorded in 2014.

The bank however has robust loan loss reserve of over N30 billion, meaning that it can afford to throw off all classified assets without hurting current revenue. This provides adequate cushion for risk of revenue shortfall and a major growth in new impairment charges. This creates an environment for stable earnings growth in an uncertain market. Zenith Bank carries a net loans and advances portfolio in excess of N1.84 trillion.

The effect of the sharp growth in interest expenses and loans loss charges on the bottom line was diluted significantly by cost moderation in operating expenses. Operating cost increased at a lower rate of 13.7% than the 20.5% growth in gross income. That reduced the proportion of revenue devoted to operating expenses from 41.1% in the third quarter of 2014 to 38% at the end of the third quarter of the current year. This represents the main factor that shielded profit from increased operating pressure in the business.

The bank earned N2.64 per share at the end of the third quarter, an improvement from N2.26 in the same period last year. The full year outlook indicates earnings per share of N3.55 for Zenith Bank at the end of 2015. The bank earned N3.16 per share at the end of 2014 and paid a cash dividend of N1.75 per share.