Company Analysis

Trading income lifts Zenith Bank from loan impairment hit


Loan impairment charges more than tripled to N98.23 billion for Zenith Bank in 2017 but management used a 456% advance in trading gains to level up the impact of credit losses on the income statement and still achieved an accelerated growth in profit. The galloping growth in loan loss expenses for the second year and the phenomenal rise in gains from trading on derivatives, treasury bills and bonds were the biggest events on the bank’s income statement in 2017.
In 2016, loan impairment charges grew by 106.4% to N32.35 billion, speeding further to 203.6% in 2017. That caused a drop of 23% in interest income net of impairment charges at N159.76 billion at the end of 2017. More than enough remedy came from a big leap in trading gains from N28.40 billion in 2016 to about N158 billion at the end of 2017.
The strength in the bank’s earnings in the year therefore came from non-interest income, which grew by 119.2% to N270.56 billion. Interest income grew by 23.4% to N474.63 billion, accounting for 63.7% of gross earnings. That represents a drop from 75.7% at the end of 2016.
Gross earnings grew by 46.7% to N745.19 billion in 2017, an accelerated growth for the second year and the strongest revenue growth for the bank in many years. Fees and commissions also contributed to the increase in gross earnings with an improvement of 31.7% to N90.14 billion – a new peak in that income line since a drop in 2015.
Apart from loan impairment charges, another major cost increase came from interest expenses, which grew more than twice as fast as interest income at 50% to N216.64 billion compared to 23.4%. That was a sharp acceleration from the increase of 16.8% in the preceding year. It permitted only a moderate improvement of 7.4% in net interest income, showing a persisting weakness in the ability of the bank to convert interest income into profit.
Interest expenses claimed an increased proportion of interest income at 45.6% in 2017 compared to 37.5% at the end 2016. With the drop of 23% in net interest income after impairment charges on financial assets, the indication is that the core lending and investing business of the bank contributed negatively to the growth in the bottom line in 2017. Earnings from non-core activities remedied the decline from core business and accounted exclusively for the profit growth registered in 2017.
Total operating cost rose by 30% to N226.86 billion in 2017 – the strongest growth in several years. Despite that, it moderated relative to gross earnings, showing a sustaining improvement in efficiency ratio. Operating cost margin declined for the fourth year running from 34.4% in 2016 to 30% at the end of 2017 – one of the lowest cost margins in the banking industry. This means the bank continues to use a declining average cost to generate a naira of its gross earnings.
The cost saved from operating activities could not fully counter the big cost increases in interest expenses and loan impairment charges. That resulted in a decline in profit margin in the year. Net profit margin went down from 25.5% in 2016 to 23.9% in 2017 – the lowest net profit margin the bank has seen since 2012.
Zenith Bank closed the 2017 financial year with an after tax profit of N177.93 billion, an increase of 37.2% over the prior year’s figure and one of the biggest profit figures in Nigeria’s corporate space. The bank’s large profit capacity is a function of its large revenue and comparatively high profit margin.
Management effected an asset restructuring in 2017 that saw a cut down on loans and advances to customers – an expected response in an environment of rapidly growing credit losses. It closed the year with net customer lending of N2.1 trillion, down from N2.29 trillion in 2016. It built up its portfolios of treasury bills and investment securities by 68% and 66% respectively.
The bank earned N5.66 per share in 2017, up from N4.12 per share in the preceding year. The board has proposed a final dividend of N2.45 per share to shareholders, having paid an interim of 25 kobo per share in the course of last year. The bank’s register is scheduled to close between 4th and 9th April while payment date is April 13, 2018.

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