Zenith Bank’s N244bn profit in 2021 powered by cost of funds slash

Zenith Bank Plc saved slightly over N14 billion from a cut in interest expenses to N106.8 billion in 2021. The cost reduction powered a N14 billion increase in after tax profit to N244.6 billion at the end of the year.

The bank’s audited financial report for the 2021 financial year shows that its management slashed cost of funds for the second year after a reduction of 18.4 percent in 2020. A further drop in interest expenses last year takes the bank’s interest expenses figure to the lowest mark in eight years.

The giant bank has been going low cost since it cut interest expenses by one-third to N144.5 billion in 2018. Except for a marginal increase of 2.8 percent in 2019, cost of funds has been downward bound since then.

Interest income has been equally on a downward trend after a drop of 7 percent to N440 billion in 2018. With a marginal improvement of 1.6 percent to N427.6 billion, interest earnings have remained well below the peak figure of N474.6 billion the bank registered in 2017.

The net effect however is that cost of funds are declining well ahead of interest income, which spells the bank’s cost efficiency drive in recent years.

In 2014, Zenith Bank used a naira of interest expenses to generate N2.93 of interest income. Since 2018, interest earned with the naira of interest expenses have advanced to N3.05 in that year to N3.47 in 2020 and further to N4.0 at the end of 2021.

The proportion of interest income claimed by interest expenses dropped from 29 percent in 2020 to 25 percent at the end of 2021. The drop in interest expenses enabled an increase of more than N21 billion in net interest income, which amounted to almost N321 billion at the end of the year.

An upsurge in loan impairment expenses seen in the third quarter intensified in the final quarter. As much as N31 billion or more than one-half of the N60 billion loan impairment expenses for the year occurred in the final quarter.

This led to a rapid growth in credit losses for the bank for the third year running. Impairment charges on financial assets grew by about 52 percent after a 64.5 percent rise in the preceding financial year.

Further pressure on the side of cost arose in the year from general operating expenses – which rose by close to N33 billion to over N180 billion. Management however kept personnel and other costs under effective control.

The challenge in the year was how to generate sufficient revenue and extract as much cost savings as possible to balance the cost increases and still keep profit moving up. The only cost saving happened in respect of cost of funds and management extracted as much as it could.

Strong revenue gains came from non-interest income, which accounted for much of the revenue improvement in the year. Zenith Bank raised gross earnings by roughly 10 percent to N765.6 billion in 2021, an accelerated growth from 5 percent increase in 2020.

Only two income lines accounted for the increase in gross earnings in the year. One is trading gains, which rose by 57.6 percent to over N167 billion. The other is net fee and commission income that grew by 31 percent to N103 billion.

The key strengths of the bank in 2021 are the big cut in cost of funds and the revenue gains from non-interest income. Management applied the strengths to make up for the two major weaknesses of huge growth in loan impairment expenses and increased operating cost.

Zenith Bank closed the 2021 operations with a balance sheet size of N9.4 trillion, an increase of N967 billion over the closing figure of N8.5 trillion in the preceding year. Its key assets are loans and advances of N3.3 trillion, treasury bills of almost N1.8 trillion, cash and bank balances of N1.5 trillion and investment securities of N1.3 trillion.

The bank’s assets are built on depositors’ funds of N6.5 trillion, an equity cushion of about N1.3 trillion and borrowings of N750 billion.