Zenith Bank Plc paved its way through revenue drop in the first quarter to deliver its corporate purpose of building value for shareholders. Defying the difficult operating terrain of the first quarter, the bank’s management set an example of how to raise profit when revenue is down.
The bank suffered a drop of close to N10 billion or about 6 per cent in gross earnings in the first quarter but was able to push up profit by N2.5 billion year-on-year in the first quarter. This reflects a gain in the ability to convert revenue into profit. It closed the quarter with a higher profit margin than any time in the past 10 years.
Cost management stringency provided the strength to build profit from a revenue drop. The bank achieved a significant cost reduction in the key cost heads – which provided room to convert an increased proportion of revenue into profit.
A lot of cost-saving was extracted from interest expenses and this is a trend that is running for the bank for the fourth straight year. Also, expenses on loan impairment declined in the first quarter, which is a sudden change of direction from a major increase last year. Operating expenses however grew against the drop in revenue due to upward pressure from rising inflation.
Zenith Bank recorded declines across most of the income lines in the first quarter and closed the period with gross earnings of N157 billion. The figure is a drop of N9.5 billion or 5.7 per cent year-on-year.
Interest earnings – the principal income line, led to a drop in revenue with a decline of 11.5 per cent to N101 billion. This was partly compensated by a doubling of fee and commission income to over N31 billion. However, all the other key income lines went down over the review period.
A favourable development for the bank is that the drop in interest income was more than countered by a drop of as much as 45 per cent in interest expenses to N18 billion, With the drop, interest expenses thinned down in proportion of interest income from 29 per cent in the same period last year to less than 18 per cent in the first quarter.
The development resulted in a cost-saving of close to N15 billion for Zenith Bank from the cut in interest expenses in the first quarter. The cost-saving transformed the drop in interest income into an increase in net interest earnings. The bank closed the first quarter operations with a net interest income of over N83 billion, which is a moderate improvement year-on-year.
The second major cost-saving area is loan impairment cost, which recorded a favourable turn of events from a major increase last year to a decline in the first quarter. From an upsurge of 65 per cent in loan impairment charges to over N39 billion in 2020, the bank shifted to a decline of 2.4 per cent to N3.8 billion in loan loss charges year-on-year in the first quarter of 2021.
The change of direction signals possible further gains in profit margin in the course of the year. Two preceding years of rapid increases in loan loss expenses have limited profit improvements over the two years.
Operating expenses however grew by over 6 per cent to N69.5 billion year-on-year against the drop in gross earnings. Inflationary pressure accounted for the increase in total operating cost – which claimed an increased proportion of revenue at over 42 per cent in the first quarter compared to 39 per cent in the same period last year.
The cost saved from the drop in interest expenses was good enough to make up for the increase in operating cost. It permitted an overall cost saving that improved profit capacity against the decline in revenue. The bank improved its profit margin from 30.3 per cent to 33.7 per cent over the review period.
Zenith Bank posted an after-tax profit of N53 billion at the end of the first quarter, which is an increase from N50.5 billion in the same period in 2020. The ability of the bank’s management to defend profit in the face of revenue drop is the strength that its management put forward in the first quarter.
The bank is sustaining an aggressive growth campaign in the size of the balance sheet for the second year. It grew the balance sheet by N202 billion over the first three months of the financial year. The bank had expanded total assets by as much as one-third in 2020.
It closed the first quarter operations with an asset base of N8.7 trillion – which is mainly composed of customer loans and advances of over N2.8 trillion, cash and bank balances of nearly N1.8 trillion, treasury bills of N1.6 trillion and investment securities of a little below N1 trillion.
Asset expansion is powered by the injection of close to N335 billion in customer deposits in the first quarter. That raised total customer deposits in the bank to N5.7 trillion at the end of the review period.
The outlook for the bank indicates that the significant cost saving made from interest expenses would be sustained. However, loan impairment expenses aren’t likely to follow a predictable path this year. The general direction of loan impairment charges for banks this year is upward.
Zenith Bank earned N1.69 per share at the end of the first quarter, improving from N1.61 per share in the same period last year. Through the volatile behaviour of costs and incomes, the bank maintains a track record of growing earnings for shareholders.
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