Zenith Bank: High-speed Takeoff Fails To Improve Profit
Zenith Bank Plc kicked off the 2020 operations with high-speed growth in earning assets but that produced only an upward creep in the bottom line at the end of the first quarter. The bank closed the first quarter operations in March with an asset base of more than N7 trillion, a surprising leap of 12.3 percent in three months. This is already close to twice the growth of 6.6 percent in the size of the balance sheet the bank recorded in all of 2019.
The principal earning assets – loans and advances, are one of the growth drivers on the asset side of the balance sheet at an increase of 12 percent to N2.58 trillion at the end of the first quarter. This means an addition of over N275 billion to the net credit volume in a space of three months. The bank’s loan portfolio had grown by N480 billion in the entire 2019 financial year.
Lending to other banks led the asset expansion bid at an increase of 43 percent or over N301 billion from the 2019 closing figure. Zenith Bank, therefore, closed the first quarter of the 2020 financial year with total loans and advances portfolio in the region of N3.6 trillion, up from N3 trillion at the end of last year.
Management’s optimistic asset expansion drive tends to defy the anticipated economic decline this year with its associated increase in default risk. Credit loss expenses were already on the rise in the first quarter at 88.5 percent to nearly N4 billion. This is an accelerating growth from an increase of 31 percent at the end of 2019.
The asset expansion was powered by a leap in other liabilities that jumped 166 percent to N969 billion from the 2019 closing and also by a gain of N200 billion in customer deposits to roughly N4.5 trillion at the end of March.
The challenge for the bank during the quarter is that the big leap in assets isn’t reflecting in terms of earnings. Interest income, the biggest revenue line of the bank, declined instead by 6.7 percent to N114 billion, maintaining a declining trend in interest income for the third straight year.
The second biggest income line – fee and commission income also dropped by 27.6 percent to N15.5 billion year-on-year. Growing assets with declining earnings present a weak combination that closes the room for growing shareholder value so far.
Interest yield per naira of total loans and advances declined from 5 kobo in the same period in 2019 to 3 kobo at the end of the first quarter of this year.
Some cost-saving was extracted from interest expenses, which declined at a faster rate than interest income. At close to N33 billion, interest expenses dropped by about 10 percent compared to the 6.7 percent decline in interest income. That narrowed the decline in net interest income to 5.4 percent to N81.5 billion over the review period.
Further operating strength came from robust growths in two-income lines – trading and other incomes. Trading income nearly doubled to stand at N15.5 billion while other income multiplied close to four and half times to N15.7 billion. The two-income lines leveled up the drop in interest income and accounted for the improvement the bank recorded in gross earnings in the first quarter.
Zenith Bank closed the first quarter with gross earnings of N166.8 billion, an increase of 5.5 percent year-on-year. The bank is yet to recover fully from a drop of 17 percent in gross earnings in 2018 and the strength to accomplish that was missing in the first quarter.
The volatile behavior of key revenue lines has continued to mark the bank’s earnings performance in recent years. Interest income is dropping for the third consecutive year; fee and commission income that recovered last year from a drop in the prior year is down again this year. Trading income that is leading revenue growth for the second year is still recovering after dropping by nearly one-half in 2018. Other income is coming alive this year after three years of a sustained drop.
There appears to be no room for further cost-saving from operating expenses this year after two years of significant squeezes. Total operating expenses grew by 10 percent to N65.4 billion year-on-year at the end of the first quarter – almost twice the improvement in gross income.
The proportion of revenue devoted to operating cost, therefore, increased from 37.6 percent in the same period last year to over 39 percent at the end of March 2020. The bank is seeing the highest operating cost margin in six years.
The summary of the Zenith Bank’s first-quarter trading is that the ability to convert assets into revenue and revenue into profit weakened all the way. Rising loan loss expenses and operating costs consumed increased proportions of revenue and therefore undermined profit margin during the quarter.
Net profit margin declined from 31.8 percent in the same period in 2019 to 30.3 percent at the end of the first quarter this year. Profit margin only inched up at the end of last year to 31.5 percent.
Zenith Bank closed the first quarter operations with an after-tax profit flat at N50.5 billion. Profit improvement slowed down for the second year in 2019 and the strength for a rebound this year is yet to be seen.
The earnings outlook is hazy for the bank as to how far the boost in earning assets may quicken revenue performance in the second quarter, the outcome of defiant portfolio growth in a clobbered economy, and the effect of the limited cost-saving room on the bottom line.
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