Revenue weakness of Zenith Bank Plc that showed up in 2018 failed to heal in 2019. Gross earnings had fallen by 17 percent in 2018 and managed to creep up by 5 percent to N662 billion in 2019. That remains 11 percent down from the peak gross income of over N745 billion the bank registered two years before in 2017.
How the bank has been growing profit consistently amid the revenue weakness reflects the reality of the cost cutting bandwagon that has become the norm in the banking industry. Cutting from other stakeholders to build wealth for shareholders is the chorus of bank managements attempting to put up good performances in bad earning seasons.
While gross earnings dropped by 17 percent to N620 billion in 2018, Zenith Bank grew after tax profit by about 9 percent to over N193 billion. The bank’s full year earnings report for the 2019 financial year follows the same pattern of growing profit ahead of revenue at 8 percent compared to 5 percent. The decelerating profit performance over the two years however shows the limitation of cost cutting as a profit growth strategy.
Zenith Bank boasts one of the largest gross earnings in the banking industry and the persisting revenue weakness for the second year indicates more fundamental constraints facing the bank and the banking industry. The earnings weakness centres on interest income – the main income line of banks.
Zenith Bank has lost interest income for the past two years with drops of 7.3 percent to N440 billion in 2018 and 5.6 percent to N415.6 billion in 2019. Compared to the 2017 peak figure of about N475 billion, interest income was down by 12.5 percent at the end of 2019.
Falling interest income is in spite of an outstanding growth of over 26 percent in the principal earning assets – loans and advanced to N2.3 trillion in 2019. This is one of the largest credit volumes in the Nigerian banking industry. The increase in 2019 represents over N482 billion in new lending in the year.
Investment assets also grew by 5 percent to N591 billion at the end of the year. The drop in interest earnings against the strong growth in earning assets indicates a sustaining decline in the average asset yield.
A decline in asset yield itself points mostly to asset quality impairment. Net loan impairment expenses resumed rapid growth in 2019 at an increase of 31 percent to N24 billion after a sharp drop of 81 percent in 2018.
The strength to level up the drop in interest income and keep gross earnings up last year came from non-interest earnings. Trading gains was the driver of non-interest income in the year at an increase of 47 percent to N178 billion. Net fee and commission income also grew by 22 percent to over N100 billion. Non-interest income therefore accounted exclusively for the improvement in gross earnings in 2019.
The bank ended the 2019 financial year with an after tax profit of almost N209 billion –a year-on-year profit growth of 8 percent. This is a slight slowdown from an increase of about 9 percent in after tax profit in the preceding year.
The ability to improve profit ahead of gross earnings in the year came from some cost saving. This was obtained from only one of the three major expenditure lines of the bank – operating expenses. The bank’s management cut operating cost by 6 percent to about N129 billion in the year. With that, it extracted a saving of over N9 billion for the bank that enabled it improve profit margin and grow profit.
Cost saving was not possible from the two other major expenditure lines – interest expenses and impairment losses on loans and advances – both of which provided the cost saving that enabled profit improvement in 2018. In 2019, the two cost lines shifted from a cost saving angle in the preceding year to a revenue consuming side.
Interest expenses rose by close to 3 percent to N148.5 billion at the end of 2019 while interest income dropped. This is a round-about turn from a huge drop of 33 percent in cost of funds 2018, indicating the high level of volatility in operations.
The implication is that Zenith Bank incurred a higher average interest cost to generate the naira of its interest income in 2019 than in the previous year. The increased cost of funds in 2019 eroded net interest income, which dropped by 10 percent or N20 billion to N267 billion at the end of the year.
A sudden change of direction in loan impairment expenses from 81 percent drop in 2018 to a rise of 31 percent to N24 billion in 2019 points to further weakening of the overall asset quality standard. The increase in loan impairment expenses led to a drop of over 12 percent in the bank’s interest income net of loan loss expenses.
To what extent the increase in the volume of loans and advances by as much as 26 percent is affecting the bank’s overall credit quality standard will be explored in the second part of this analysis. The bank had cut loans and advances for two years from N2.29 trillion in 2016 to N1.82 trillion in 2018.
Management rebuilt credit volume in 2019 to N2.3 trillion and sacrificed credit quality standard in the process.
Can this be taken as a measuring rod of the effect of the Central Bank’s increased loan-deposit ratio on the performance of the bank as well as the banking industry?
This will be dealt with in the second part of this analysis.