HI 2019: How income diversification, NII growth lifted Zenith Bank profitability

As commercial banks strive to remain profitable in a challenging operating environment like Nigeria, MOTOLANI OSENI looks into factors that lifted Zenith Bank Plc profitability growth in the half-year (H1) ended June 30, 2019.

The financial institution in its H1 ended June 30, 2019, audited result and accounts reported strong bottom-line profitability, driven by growth in gross earnings improved Non-Interest Income (NII) and continued cost optimization.

Considering reported figures for the period under review, the lender continually improve on its income diversification and growth with an increase in NII, largely attributable to rise in net fee and commission income and increase in trading income in the period under review.

The Daily Times checks showed that the bank recorded an increase in gross earnings, which has consistently lifting the bank’s profits profile, as well as improved operating efficiency, thus interim dividend payout to shareholders and improved Earnings Per Share (EPS).

Also, Zenith Bank’s Profit Before Tax (PBT) grew by four per cent from N107.3 billion in H1 2018 to N111.7 billion in H1 2019. The 23.9 per cent growth in NII accounted for the growth in PBT.

With improved PBT, shareholders of Zenith bank are expecting N0.30 per share interim dividend come August 29, 2019. The proposed dividend of N0.30 per has been declared by the management for the second consecutive year.

Zenith bank joined Guaranty Trust Bank plc (GTBank) to breach up with Central Bank of Nigeria (CBN) the new statutory limit for Loan-Deposit Ratio (LDR) of 60per cent.

The bank in the period under review breached LDR, reporting 51.2per cent as at H1 2019 from 54.6per cent in full ended December 31, 2018, caused by a three per cent decline in loans & advances to customers.

Increase in Gross earnings

For the period under review, Zenith bank reported gross earnings increase by three per cent from N322.2 billion to N331.6 billion driven by the significant growth of 24per cent in non-interest income from N88.6 billion in H1 2018 to N109.7 billion in H1 2019.

In particular, fees from electronic products increased by N17billion, 168per cent from N10billion in H1 2018 to N27billion in H1 2019, demonstrating significant progress in our retail banking initiatives.

Interest income decline by six per cent to N214.6 billion in H1 2019 from N228.67 billion in H1 2018 as a result of the decrease in yields on interest-bearing assets such as loans and advances that dropped by 21 per cent to N115 billion in H1 2019 from N146.4 billion in H1 2018.

Also, interest income from Treasury bills grew by three per cent to N53 billion from N51.4 billion in H1 2018.

Interest expenses also dropped by 3.51 per cent to N72.1 billion in H1 2019 from N74.7 billion in H1 2018, reflecting the bank’s drive towards the cost of funds optimization which decline from 3.4 per cent to three per cent in H1 2019. Consequently, net interest income dropped by 7.43 per cent to N142.5billion from N153.96billion in H1 2018.

Impairment charge appreciated by 41.31 per cent to N13.74 billion in H1 2019 from N9.7 billion in H1 2018.

However, net fee and commission income charge gained 33.62 per cent to N55.82 billion in H1 2019 from N41.77 billion in H1 2018.

The group’s drive towards the cost, optimization yielded positive result as total operating expenses increased by one per cent to N126.8 billion in H1 2019 from N125.5 billion in H1 2018 while the cost to income ratio improved from 53.9 per cent to 53.2 per cent as at H1 2019.

The management still has some work to do in achieving its target of 48 per cent in 2019 financial year.

The group income tax expenses dropped to N20.9 billion in H1 2019 from N23.96billion in H1 2018, to position profit after-tax increase of nine per cent to N88.88 billion in H1 2019 from N81.7 billion reported in H1 2018. EPS increasing by nine per cent to N2.83 in H1 2019 from N2.60 compared to the prior period.

Strong and liquid balance led by securities portfolio

Zenith bank between December 2018 and June 2019 reported total assets decline of one per cent to N5.89trillion as at June 30, 2019, from N5.96trillion, reported in 2018 full year result and accounts.

The Group’s total deposit increased by three per cent to N3.8 trillion from N3.69trillion with retail deposits growing by N267 billion (31per cent), from N861 billion to close at N1.1 trillion.

Despite the growth in its deposit base, the Group optimized interest expense leading to a four per cent reduction from N74.7billion to N72.1 billion due to the Group’s improved funding mix and our profound treasury management skills.

However, the marginal movement in Non-Performing Loan (NPL) ratio to 5.3 per cent from five per cent in H1 2018, as a result of the three per cent reduction in our loan book from N2.02 trillion as at December 2018 to N1.95 trillion at the end of the period.

In addition to the balance sheet, shareholders’ fund remained flat at N819.5billion from N815.75 billion reported last year.

The financial institution remains committed to maintaining a stronger balance sheet with liquidity ratio at 74.6per cent in H1 2019 from 80.9 per cent reported in 2018 and Capital Adequacy Ratio (CAR) at 25per cent, ensuring it remains above regulatory thresholds.

Net Interest Margins (NIMs) witnessed a compression from 10 per cent in the same period last year to 8.6per cent in H1 2019, as a result of the declining yield environment.

Conclusion

The Bank is year is planning to grow its retail banking business. This will be achieved through the deployment of innovative products in mobile banking, internet banking and cards service.

Also, in agriculture, the management of Zenith bank is ready to work with the federal government’s resolve to boost the agriculture sector in the country would no doubt create quite a number of opportunities in the areas of funding job creation and indeed food security.

In addition, the bank in the remaining months of 2019 is seeking opportunities to grow its rusk assets while maintaining a low NPL ratio and sustain its improved coverage ratio.

We uphold BUY recommendation and target price of N37.0 despite the price closing last week at N18.60 per share last week.