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How non-funded income growth, operational efficiency drove Zenith Bank’s profit

More strategic facts have emerged from the recently released Zenith Bank Plc.’s audited H1-19 result.

Key take away from the result which seems to be in line with industry pundits was how non-funded income growth and operational efficiency drove profit expansion of the bank within the period under review.

The result showed that whereas gross earnings growth remained tepid, expanding moderately by 2.9% y/y, non-funded income growth provided the needed support. This led to a moderate expansion in PBT, as Opex expansion remained moderate despite regulatory-induced cost pressures.

In the spirit of the result, Zenith Bank has proposed an interim dividend of NGN0.30/share, which translates to a yield of 1.81% based on the closing price on the 19th of August 2019 (NGN16.60).

The gross earnings recorded remains in line with experts’ projection and FY-19 estimate and may settle 1.30% y/y lower based on the current run rate. The top-line growth was primarily supported by the 23.86% y/y expansion in non-interest income, which was boosted by net fees and commissions (+33.62% y/y) and trading gains (+22.53% y/y) income growth. The growth in non-interest income is outpacing our FY-19 estimate, which at the current run-rate would settle 5.40% higher y/y.

On the other hand, interest income declined by 6.15% y/y, driven by weak risk asset creation and declining yields on fixed-income securities. Consequently, income from loans and advances to customers declined by 21.43% y/y, completely offsetting the 21.06% y/y growth in income from investment securities. Similarly, interest expense declined by 3.51% y/y, partly offsetting the impact of the declining interest income, however, net interest income still printed 7.43% y/y lower.

Whereas operating expenses settled 1.08% y/y, a -6.30% deviation from industry pundits’ estimate, with the most pressure stemming from personnel expenses (+11.25% y/y), the bank stood firm despite the impact of the increased regulatory costs (AMCON levy and NDIC premium). Opex growth was muted given the management of ancillary costs i.e. cost on fuel and maintenance (-27.44% y/y), and corporate promotions (-56.44% y/y).

Indications show that consequent on the marginal growth in both operating income and Opex, the bank’s cost-to-income ratio settled at 53.2% (H1-18: 53.9%). This further translated to an expansion in profitability, as profit-before-tax settled 4.02% higher y/y, while profit-after-tax grew by 8.7% y/y, on account of an 11.03% decline in tax expense. This translated to Return on Average Equity and Return on Average Assets ratios of 21.74% and 3.00% respectively.

Zenith Ebenezer Onyeagwu
Ebenezer Onyeagwu, incoming GMD of Zenith Bank Plc

Experts’ views on the overall performance suggest that Zenith Bank’s macro-prudential ratios are above par, with only the non-performing loans ratio settling above the regulatory limit (5.3% relative to 5.0% statutory limit).

All other ratios are settled well above regulatory minimums; Liquidity ratio (74.6% relative to 30.0%), Capital Adequacy (25.0% relative to 16.0%).

Analysts however, note that the bank’s current reported loans to deposit ratio (51.2%) is below the new minimum LDR of 60.0%, but the scenario does not seem to have been adjusted for the new weightings for the Retail, SMEs, Consumer credit and Mortgage segments.