Zenith Bank Charges Off N240bn In Credit Losses In Five-years

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Zenith Bank Plc has charged off N240 billion in credit loss expenses in five years to 2021 and loan losses are yet speeding up for the fourth straight year in 2022. Credit impairment expenses accelerated from a major increase of 50 per cent at the end of 2021 to over 75 per cent in the first quarter of the current financial year to N6.8 billion.

The unaudited financial report of the bank for the first quarter ended March 2022 shows loan losses are leading to cost increases this year and this isn’t permitting sufficient room to raise profit. Huge charge offs in loan impairment losses continue to encroach on earnings and consequently choke margins. Profit improvement has slowed down since 2018, as loan losses outmatch the increase in interest earnings.

Revenue is however picking up for the bank this year with gross earnings advancing by about 22 per cent year-on-year to N191.5 billion in the first quarter. This is accelerated growth in revenue from less than 10 per cent improvement at the end of 2021. 

Trading income-led revenue growth in the quarter, advancing by 159 per cent to N32.6 billion while net fee and commission income rose by 16.7 per cent to N33.5 billion.

But much of the revenue gains were consumed by rising expenses, which limited profit improvement to less than 10 per cent to close at N58 billion for the first quarter operations. The challenge for the bank’s management is that inability to grow profit with revenue is persisting, even intensifying in the current financial year.

That was equally the pattern for the bank last year when after-tax profit improved by 6 per cent to N244.6 billion against the roughly 10 per cent growth in gross income to N765.6 billion. This shows that the cost to income balance of the bank is weighing heavier on the side of cost to the detriment of margins.

Profit margins are still maintained at the top of the industry range but there is a downward creep from 33.1 per cent in 2020 to 31.9 per cent in 2021 and further down to 30.4 per cent in the first quarter of the 2022 financial year. The bank needs to speed up revenue growth in order to step up profit margin in the face of rapidly growing costs.

The bank’s management found no room for cost saving in the first quarter, as all the key cost lines of the bank are upward bound. A large room for cost-saving from interest expenses the bank exploited last year was unavailable in the first quarter of the current year.

Management had cut the cost of funds by more than N14 billion at the end of 2021 operations but this year so far, interest expenses are surging upward. Cost of funds advanced by about 44 per cent to stand at almost N26 billion in the first quarter of the current financial year, marking the strongest increase in interest expenses for Zenith Bank in many years.

The growth in interest expenses is well in excess of an increase of about 25 per cent in interest income for the period, which amounted to N126.4 billion. Yet, it is an upturn from a downward trend in interest earnings since 2018. Last year saw only a marginal improvement of 1.6 per cent in interest income to N428 billion for the year. 

Despite the strong growth in interest expenses, the bank still raised net interest income by 21 per cent to N100 billion for the quarter, which is an accelerated growth from 7 per cent recorded in 2021. 

Total operating expenses, the biggest cost line of the bank added to the increased cost pressure in the first quarter. Inflation-driven operating expenses led to a strong increase in total operating expenses in the first quarter at about 23 per cent to over N54 billion. Personnel costs also grew by 16 per cent to stand at N21.5 billion at the end of the first quarter.

Growing costs ahead of revenue sum up the earnings story of Zenith Bank in the first quarter, which limited the ability to convert revenue into profit. How to find room to cut costs and/or speed up revenue further constitutes the challenge for the bank this year. 

With all the key cost lines racing up, will the bank find revenue robust enough to head off profit drop is the question mark on Zenith Bank in 2022? To accomplish that will require that management goes aggressive to stimulate all revenue growth functions to dilute rising costs and defend profit margin. How far management can accomplish that is the development to watch on the bank in the coming interims.
The asset structure and growth in the first quarter suggest that management is already following the path of an aggressive income hunt this year. Assets expanded by N900 billion to N10.3 trillion over the three months of the year against the increase of N967 billion in asset base for the entire 2021 financial year. 

Low risk earning assets are leading the asset expansion drive, which is led by lending to other banks that rose by 46 per cent year-on-year. It is followed by loans and advances to customers, which expanded by 45.5 per cent year-on-year to close in the region of N3.6 trillion for the first quarter. 

Investment securities also grew by about 30 per cent to N1.3 trillion and treasury bill holdings rose by 20.5 per cent to N1.9 trillion over the same period. 

The bank improved earnings per share from N1.69 in the same period last year to N1.85 per share at the end of the first quarter of 2022.