Categories: Company Analysis

Zenith Bank: Stable profit despite volatile earnings environment

Zenith Bank experienced a volatile earnings environment in the second quarter but management engaged cost management shock absorbers to keep profit growing. The bank closed half year operations with gross earnings dropping by 15% led by a fall of 44% in trading income and a drop of 13% in interest earnings – the main income line of the bank.

The bank’s management bent two major cost lines – interest expenses and loan impairment losses low enough to shield the income losses from hitting the bottom line. With that, it maintained profit stability for the bank out of operational volatility. The ability to keep profit growing even in bad earnings season is what the bank demonstrated with its performance in the first half of the 2018 financial year.

Gross earnings amounted to N322.2 billion for Zenith Bank at the end of June, down by 15% year-on-year. Trading gains are on a reversed performance this year, dropping by 44% after a 456% advance at the end of last year. It was the income line that provided the safety net for the bank in 2017 when loan loss expenses more than tripled and caused a drop of 23% in net interest income after impairment charges on financial assets.

The bank had grown revenue by close to 47% to over N745 billion last year. Based on the half year performance, gross earnings are projected to be in the region of N650 billion for Zenith Bank at full year, an expected drop of 12.7%.

Interest expenses also reversed its position last year when it grew by 50% – more than twice as fast as interest income and dropped by 39% to N74.7 billion at the end of half year operations. This reflects a drop of 8% in customer deposits to N3,166 billion at the end of the period. The impact of that was an 11% lift in net interest income to N154 billion, indicating a major cost saving from interest expenses.

Another major cost saving came from loan loss expenses, which dropped by 77% to N9.7 billion over the period, reversing the upsurge experienced last year. That lifted net interest income after loan impairment charges by nearly one-half to over N144 billion at the end of June.

Part of the cost savings was claimed by operating expenses, which increased by 7% to over N130 billion at the end of June. Operating cost therefore claimed an increased share of gross earnings at 40.5% compared to 32% in the same period last year.

Part of the cost saved still found its way down to the bottom line with an increase of 8.5% in after tax profit to N81.74 billion at the end of the review period. The bank therefore converted an increased share of revenue into profit over the period with net profit margin improving from less than 20% in the same period last year to 25.4% at the end of June 2018.

The drop in interest income seems to reflect a cut down on loans and advances to customers over the six months of the year. The bank’s credit portfolio went down by 11% to 1,873 billion at the end of half year operations – the lowest figure since 2015. That led a 6% shrink in the size of the balance sheet to N5,256 billion.

Zenith Bank closed half year operations with earnings per share of N2.60, improving from N2.40 per share in the same period in 2017. Saving cost elsewhere to remedy revenue disappointments and grow wealth for shareholders is the hallmark of Zenith Bank’s performance in the first half of the year.

The bank has announced an interim cash dividend of 30 kobo per share to shareholders on the register of members on 17th August to be paid on 3rd September 2018.