Zenith Bank H1: How to build profit in bad earnings season

Despite a generally bad earnings season in which revenue remained significantly constrained, Zenith Bank Plc was able to build profit for shareholders at half year ended June 2021. The bank’s audited accounts for the half year operations show that management applied cost-saving measures to compensate for revenue weakness.

Half year operations ended with gross earnings flat at N345.6 billion but management succeeded in pushing after-tax profit up from less than N104 billion in the same period last year to N106 billion at the end of June 2021.

The ability to defend profit against revenue constraints is a major accomplishment on the part of the bank’s management during the review period. Its strategy is cost-saving actions that improved the ability to convert revenue into profit.

Interest income is the major factor in the bank’s earnings weakness so far this year, which maintained a declining record that began in the first quarter. Interest earnings went down by 6 percent year-on-year to N204 billion at half year, a slowdown however from a drop of 11.5 percent in the first quarter. 

A compensating development came from improvements in non-interest revenue lines, making up for much of the loss in interest income. This is led by net fee and commission income, which has maintained reasonable growth so far this year. Fee and commission earnings grew by 42 percent year-on-year to close in the region of N48 billion at half year.

With the slowdown in the rate of decline in interest income and the gain in non-interest revenue, Zenith Bank was able to improve its overall revenue performance at half year compared to the position at the end of the first quarter.

The bank had closed the first quarter trading with a drop of N9.5 billion or roughly 6 percent in gross earnings. The position improved at half year with only a marginal decline in gross earnings.

The bank’s management reinforced the strength gained in revenue performance with cost management stringency. This combination provided it with the strength to push profit marginally up against flat revenue during the review period.

Management extracted cost savings from two major cost lines of the bank – interest expenses and loan impairment charges.

Interest expenses went down by 26 percent year-on-year to stand at N44 billion at half year. The drop represents a reduction of N15.5 billion in cost of funds and a major drop in interest expenses for the bank for the second year.

Interest expenses claimed a reduced proportion of interest income at 21.6 percent at half year compared to over 27 percent in the same period in 2020.

The second major cost-saving line for Zenith Bank at half year is loan impairment expenses, which has reversed from a major increase of over 64 percent last year to a decline at half year.

The rate of decline in credit loss expenses has accelerated from 2.4 percent in the first quarter to over 17 percent at half year, closing at a little below N20 billion at the end of June 2021.

The big cost saving from interest expenses enabled the bank to improve net interest earnings from a drop in interest income. At about N160 billion at the half year, Zenith Bank achieved a moderate improvement in net interest earnings.

Despite the drop in loan losses at half year, rapid growth was recorded in the second quarter from only N3.8 billion at the end of the first quarter. The indication is that rising credit losses may be expected for the bank in the second half.

The ability to save cost from loan impairment expenses may therefore weaken in the second half of the financial year. Despite that, a slowdown from two years of rapid increases in loan loss expenses can still be expected for the bank at full year.

With rising inflation, the bank could not prevent operating expenses from rising. Total operating expenses grew by 10 percent year-on-year to about N150 billion, claiming over 43 percent of gross earnings against 39 percent in the same period last year.

Zenith Bank was able to achieve a positive cost-income balance at half year, which saw profit slightly improved against the inability to raise revenue. The bank made a modest gain in net profit margin at 30.7 percent at the end of June.

The bank closed the half-year operations with an after-tax profit of N106 billion, improving from N103.8 billion in the same period in 2020. Retaining the ability to grow the wealth of shareholders despite earnings disappointments marks the resilience of the bank’s management quality.

Zenith Bank boasts a balance sheet size of N8.5 trillion, one of the largest bank balance sheets in the Nigerian banking space. Its assets are financed mostly by customer deposits of N5.7 trillion at the end of June 2021.