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How Zenith Bank Expands Profit From Slow Earnings

Zenith Bank, Nigeria’s biggest bank by profitability, had gross earnings slowing in the first quarter of 2019 but wrenched up bottom line with a deft application of management’s experience beginning from leveraging net interest income.

By hauling up net interest income by almost a quarter to N86.14 billion from N69.99 billion, Zenith Bank showed that it’s not what you get but what you make out of it that matters.

Revenue had had a slip by 6.5 percent to N158.11 billion from N169.2 billion, a potential spoiler. But after suppressing interest expenses by 22.2 percent to N36.34 billion from N46.72 billion while at the same time guiding the growth of interest income by 5 percent to N122.5 billion from N116.7 billion, net interest income, which is a guide to how well a bank manages the interest rates it pays for borrowing and lending, jumped many paces to give a positive outlook to pre-tax profit.
Pre-tax profit of the leading bank, buoyed by 6 percent in the period to N57.29 billion from N54 billion. This helped to shoot up pre-tax profit margin to 36.2 percent, up from 32 percent. with that rise in pre-tax profit, the bank’s net profit flew 6.7 percent to N50.23 billion from N47 billion in the period, leading to a rise in net profit margin to 31.7 percent from 27.8 percent.
The first quarter result is the beginning of another attempt to wring good profit as was done in the last financial year, in its attempt to reaffirm leadership of the sector.

The firm performance is a harbinger of a juicier outing in the 201 9 financial year In that year, the bank’s profit before tax (PBT) was N232 billion, up 16 per cent from N199 billion in 2017; while profit after tax (PAT) was N193 billion in 2018, up 11 per cent from N174 billion in 2017, in a somewhat fragile economy that is recovering from recession.
To cement its place as the most profitable bank, return on equity (ROE), and return on assets (ROA), improved to 23.8 per cent and 3.3 per cent in 2018 from 22.9 per cent and 3.4 per cent respectively in 2017. This is as gross earnings dropped by 15.4 per cent, from N745 billion in 2017 to N630 billion as at end 2018.

Similarly, the bank’s total assets grew by 6 per cent, from N5.60 trillion in the preceding year to N5.96 trillion in 2018; while shareholders’ fund grew marginally by 0.5 per cent, from N812 billion in 2017 to N815 billion in 2018. For such weighty shareholders’ fund, it is natural to pull in heft deposits as total deposits grew 7.3 percent to N3.69 trillion from N3.44 trillion.
But it was the bank’s ability to meet and surpass regulatory guidelines that was the highlight of the full year results. Interest expenses were managed down by reduced by 33.3 per cent, as the bank’s stock of low-cost deposits increased, with interest paid on time deposits declining the most by 61.1 per cent.

Also, the cost of risk dropped to 0.9 per cent as against 4.3 per cent in 2017 while loan loss expenses moderated by 81.3 per cent.
The bank’s balance sheet was robust as the loan to deposit ratio, liquidity ratio and capital adequacy ratios were 44.2 per cent, 72.0 per cent and 25 per cent respectively, all well above the regulatory threshold. However, there was a moderation in the bank’s capital adequacy ratio (CAR), from 27.0 per cent in 2017 as a result of the initial IFRS9 adjustment for the new expected credit loss (ECL) model for impairment recognition.

The bank’s non-performing loans ratio, however, increased marginally to 4.9 per cent in 2018 from 4.7 per cent in 2017. However, this is still within the regulatory threshold and far below industry peers.
Also, the bank’s robust risk management framework ensured that the cost of risk reduced significantly from 4.3 per cent in the prior year to 0.9 per cent in 2018. This was achieved through the reduction in impairment charges by 81 per cent, N80 billion, compared to 2017, re-affirming the bank’s enhanced asset quality. In the same breadth, coverage ratio increased by 34.2 per cent from 143.4 per cent to 192.4 per cent over the same period, an indication of prudent disposition consistent with the bank’s known record of excellent credit risk management.

As a result of the significant improvement in efficiency, the bank’s cost-to-income ratio settled at 49.3 per cent from 52.8 per cent in 2017.
The bank’s customer deposits grew by 7 per cent led by an increase of N109 billion in savings and an increase of N122billion in current accounts, providing it with a platform to rebalance its deposits mix. In 2018, costly deposits were foregone in favour of cheaper and more stable deposits resulting in a reduction of expensive and shorter dated deposits by N110 billion.

This culminated in the reduction of cost of funds which declined by 40 per cent from 5.2 per cent in 2017 to 3.1 per cent for the year.
The results were a testament of the bank’s efforts to deepen its roots in the retail segment. This has led, in the main, to a remarkable increase in the volume of transactions across various electronic platforms as well as significant customer acquisitions.

This growth in transactions on the bank’s digital channels continues to support the bank’s retail push as fees from e-products increased by 44 per cent over 2017 with retail deposit balances also growing by 25 per cent.

The bank also stated that it would continue its investment in the retail end of the market to consolidate its leadership in both the corporate and retail segments.
Speaking on the performance for that financial year, Chairman, Jim Ovia, assured shareholders of the bank’s commitment of continuing to deliver superior returns in the years ahead. Ovia said Zenith Bank remains a clear leader in the digital space, with several firsts in the deployment of innovative products, solutions and an assortment of alternative channels that ensure convenience, speed and safety of transactions. “To continue to cater to the varied appetites of our customers in a constantly changing world and stay ahead of the competition, therefore, we have invested massively in new technologies and innovative solutions in the last financial year. This is geared towards ensuring that we continue to provide best in class quality services that create value for all our stakeholders,” he said, noting that Zenith Bank made significant progress in the adoption and integration of sustainable banking principles into its business, especially in its credit administration process.
Consistent with this excellent performance and in recognition of its track record of stellar performance, the bank was recently ranked as the Most Valuable Banking Brand in Nigeria in 2018 by The Banker Magazine. Similarly, Zenith Bank was recognised as the Best Corporate Governance Bank in Nigeria by The World Finance for the sixth time just as Ethical Boardroom, a Europe based Boardroom watchdog reaffirmed this recognition by naming Zenith Bank as the Best Bank in Corporate Governance in 2018. Recognition has also come the way of the bank as it was recently named the Best Institution in Sustainability Reporting in Africa 2018 (SERAS Awards) and the Bank of the Year 2018 (BusinessDay).
According to the bank, its outlook for 2019 is positive, supported by improving macroeconomic conditions, relative exchange rate stability, and expected stability in the oil market

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